With the new LQI (Loan Quality Initiative), buyers better not make ANY purchases until after closing or there might not be a closing! Even after the mortgage loan is approved, lenders now do a final credit check to make sure nothing has changed.
This means that homebuyers could now find their closing stopped the day of closing if they make any new purchases or changes to their credit, income or assets after they make loan application. The LQI rules require lenders to re-check all of the borrower’s data to ensure that there have been NO changes since the loan application.
In the past, homebuyers were sometimes advised by their Realtor and Loan Officer not to make any purchases or open any new credit until AFTER the closing. Now with the new LQI lender re-verification of the borrower’s mortgage file within days prior to closing, homebuyers could stand to lose more than their loan approval.
Homebuyers who open new credit or increase their balances on existing credit accounts after the initial loan application, but prior to closing, could potentially lose their earnest money and possibly be sued by the seller.
Why does the LQI rule exist?
Homebuyers today are enjoying historically low interest rates coupled with incredible home prices and selection. However, these great bargains come with added lender scrutiny due to the high risk vs. return of today’s market. With as little as 3.5% down and 4.25% fixed interest rates, mortgage lenders have very little return and high risk, which is causing ever-tightening approval guidelines.
There are more reasons than just low interest rates for why the guidelines have been tightened, though. In recent years, many mortgage lenders have experienced high losses due to increased foreclosures. When they performed a quality control survey on those foreclosed mortgage files, they found that many of the borrowers who ended up in foreclosure had opened new accounts or increased existing debt balances prior to closing. These major differences between the documentation presented to the underwriter and the actual facts of the borrower’s credit income, assets and ratios at time of closing has prompted this new LQI rule.
For instance, after signing a loan application, you went out and purchased a new car with a loan. This would certainly affect your credit score, and you could find yourself denied the home purchase prior to closing when that data is pulled again.
The actual rule states that all Lenders must “determine that borrower liabilities incurred up to, and concurrent with, closing are disclosed and evaluated in qualifying the borrower for the loan”. Lenders know that the best way to do this is to run an additional credit report, right before closing. Lenders will be taking a close look at each file to ensure the borrower’s occupancy status of the property is correct. Social Security numbers and filed IRS tax returns will also be closely reviewed.
Lenders will be utilizing a new credit report call a “Comparison Report” which will highlight changes between the qualifying report and the new refreshed report.
Any changes, even minor ones, could result in a closing delay, pricing adjustment, or – worst case scenario – loan approval being withdrawn. NO SPENDING before closing, PERIOD.
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