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
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
in Portland, Ore, who made the reference to a “financial colonoscopy.” Fannie
and Freddie, he added, “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,” Jolivette said. “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 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
Freddie Mac’s new 120-day look-back rule on inquiries is designed to turn
up situations where homebuyers 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.
Ken Harney is a real estate columnist with the Washington Post.