If you've been approved for a mortgage and you’ve found the home of your dreams, you might think it’s time to celebrate. We’re all for it, but beware of how you do so: applying for more credit or a large appliance could put your whole deal in jeopardy when they run a last minute credit check.
In an effort to cut down on fraud and the sloppy underwriting that led to the subprime mortgage meltdown, this past June, mortgage giant Fannie Mae launched a “loan quality initiative” that requires lenders to get credit reports for each mortgage transaction at two different times, as well as additional verification. Your lender wants to see out if you've obtained — or even shopped for — new credit. If you have, it could affect your rate or undo the whole deal. The lender might decide that the additional debt means you can’t afford the payments.
Buyers need to watch for these potential pitfalls:
Applying for new credit – whether it’s for a new refrigerator for the new house or a car to get there – between your loan approval and your closing could put the kibosh on the deal if the new lines of credit are significant enough to affect your debt-to-income ratio in a last minute credit check. Your debt-to-income ratio is the percentage of your monthly gross income used to pay your monthly debts one of the tools that lenders use to determine loan eligibility.
Borrowers need to keep monitoring their credit score to make sure there are no significant changes, especially in a downward direction. Even if you took on no new debt, your credit score might have dropped from the time of the first credit report to the last minute credit check; for example, because of a credit inquiry
or late payment on your cable bill. A dropping score could negatively affect your loan terms and rates.
You also run the risk of losing a deposit, which may be typically 5% of the purchase price. If a last minute credit check delays the closing and in a worst-case scenario or derails the loan completely, under the terms of standard contracts or “purchase and sale agreements,” a borrower who loses financing days before closing could potentially forfeit his deposit.
How can borrowers make sure they don’t get tripped up in the new guidelines? The easiest way is to refrain from obtaining new credit and making big purchases before closing. Monitor your credit to stay on top of what’s going on. And keep your eyes focused on the biggest prize: closing on your mortgage.
Now that you know more about last minute credit checks, get your Credit Report and Score.