Lenders start looking way, way back at borrowers' credit files
WASHINGTON — One loan officer describes it as a "financial colonoscopy" on your credit, and he suggests that anybody applying for a mortgage be prepared for it.
What he's talking about is the combined effect of new credit transparency standards that have been imposed on lenders by mortgage giants Freddie Mac and Fannie Mae. As of Feb. 1, Freddie Mac began requiring lenders to dig back 120 days into your credit bureau files to detect any "inquiries" — signs of your applying for credit anywhere else — and then to check out whether any applications were approved. If they resulted in significant new debts, your mortgage deal could be affected, and your lender might have to revise the terms or the rate you're being offered.
Meanwhile, Fannie Mae is requiring lenders to track or review your credit behavior after you've been approved for a mortgage but haven't yet gone to closing. That period often extends for 60 days or more. If inquiries pop up on your files during this time, lenders must check them out to determine whether any new debt might require a re-underwriting of the originally quoted terms.
For example, if the mortgage quote is tied to specific debt-to-income ratio maximums — say 31 percent of monthly income for housing, 43 percent for total household debt — a new credit card account with a $5,000 balance might require a new underwriting or even a higher rate. If the new card account shows up late in the game — a day or two before closing, with moving vans on the way — you could face some serious problems.
"We now tell our customers that they need to be ready" for much more rigorous screening of their credit, said Matt Jolivette of Associated Mortgage Group Inc. in Portland, Ore., who made the reference to a "financial colonoscopy." "They (Fannie and Freddie) want to know everything." This means full disclosure on any credit accounts, big or small, that consumers have shopped for in the months immediately preceding and following their application.
"Our advice is this: Don't buy cars, don't buy furniture or appliances on credit until we close," said Jolivette. "You don't own the house yet, so don't buy anything for it" unless you pay in cash.
The stricter credit scrutiny rules from Freddie and Fannie have stimulated an explosion of new services and products to help lenders keep track of their mortgage clients' behavior. For example, Experian — one of the three national credit bureaus — sells a "risk and retention triggers" system that functions much like the anti-identity theft services it markets directly to consumers. Lenders can choose from a detailed menu of trigger-event occurrences they wish to know about from the application date to the closing date. These include all new inquiries for bank credit cards, retail credit accounts, auto loans and even "over-limit" features they apply for on existing accounts. The monitoring is 24/7.
Equifax, another of the big three credit bureaus, offers a similar service called "Undisclosed Debt Monitoring." Steve Meirink, an Equifax vice president, said that because of the rule changes by Fannie and Freddie, there has been "a tremendous response" from banks and mortgage companies to sign up for its program.
Other players in the credit industry offer mortgage lenders customized "refresh" pulls of files and scores that compare a borrower's data at the application and just before the scheduled closing. Marty Flynn, president of Credit Communications Inc. of San Ramon, Calif., urges clients to pull "triple merged" files from all three bureaus — TransUnion along with Experian and Equifax — because information on file can differ from bureau to bureau.
Freddie Mac's new 120-day look-back rule on inquiries is designed to turn up situations where home buyers apply for credit a couple of months before seeking a mortgage but the inquiry and new account haven't hit the national bureau files because of differing reporting schedules followed by creditors. By scanning back 120 days — the previous standard was 90 days — virtually all inquiries made during the four months preceding the application should show up. If they're not caught then, they are certain to be spotted during the scans or refresher reports obtained before closing.
The bottom line on all this: Be aware that more than ever, your credit files — not just your FICO scores — are likely being checked, rechecked and evaluated for the third of a year preceding a mortgage application and two to three months prior to the closing.
The cleaner and simpler you keep the files, the easier your path to an on-time, uncomplicated closing should be.
Kenneth R. Harney can be reached at email@example.com.