Wednesday, June 23, 2010

Second Credit Report May Delay Closings

The new Fannie Mae rules for credit have officially taken effect. They WILL change the way you do business.

These new rules affect all conforming (non-government) loans that are sold to Fannie Mae.

Here's what you need to know:

-- Shortly before the closing, the borrower's credit report must be "refreshed". A refreshed credit report shows the borrower's accounts, the balances, the minimum monthly payments, and the number of credit inquiries (the number of times the borrower has applied for credit).
-- If the borrower's total minimum payments increase enough to make the debt-to-income (DTI) ratio 2% higher than it was using the original credit report, the loan must go back to underwriting!
-- If there are any new credit inquiries, the loan must go back to underwriting!
-- Example #1: A borrower makes $5,000 gross income per month. If their payments go up by $100 or more on the refreshed report (2% of $5,000, enough to raise the DTI ratio by 2%), then the loan must be underwritten again.
-- Example #2: After the lender pulls the initial credit report, the borrower applies for a new account, or applies for an increase in the credit limit on an existing account. This will result in a new credit inquiry on the refreshed report and the loan must be underwritten again.

There is a very big chance that the loan will not close on time if it has to be underwritten again 3 days before the closing. The loan will still close (provided the borrower still qualifies), but the closing will probably be delayed.

If you are a real estate agent, here's what you need to do to minimize the impact of this new Fannie Mae rule:

-- Make sure you are using a lender who knows about the new credit rules, and make sure they are telling your buyers about it. No good lender will mind if you ask, so ask.
-- Write your contracts so the loan conditions deadline is as close to the closing date as possible - within a day or two. If the loan gets delayed because it has to go back to underwriting, your buyer is risking their earnest money. The loan conditions deadline does not have anything to do with the loan being approved. It is the last date that the buyer can get their earnest money back by objecting to the loan conditions. That means the buyer can get their money back if they say they don't like the interest rate or anything else about the loan. If you think the loan conditions deadline has something to do with the loan being approved, read the contract again to learn what it really means.
-- Repeatedly ask your buyers if they are using their credit cards or applying for new credit. If the answer is yes, you may have a problem.
-- Do not assume that these new rules will simply go away because they make life tough for lenders, real estate agents, buyers, and sellers. The intent of the new rules is to eliminate foreclosures, and they will go a long way towards doing that. These rules are probably here to stay for a very long time. Everyone needs to accept the new reality of the mortgage industry. The government is forcing us all to think strategically (long-term). Most of us only think about the short-term, and that way of thinking has resulted in the current economic mess, so they are forcing us to act differently.

The new rules are for all Fannie Mae loans. It does not matter which lender is used. If the loan is going to be sold to Fannie Mae, the lender must follow the rules. At the moment, the new rules do not apply to FHA or VA loans, but that doesn't mean FHA and VA will never adopt similar rules.

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