Closing Killers: Opening New Credit

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opening new creditMy second “Closing Killers” story is about buyers relocating from Idaho who expose their closing to one of the Closing Killer gang leaders: “Opening New Credit”!

Sam and Sue Spud had found a peach of a deal in Peachtree City. This foreclosed home was perfect. It had taken the Bank seller over 7 weeks to respond to their offer. They were finally under contract and heading for closing. If they missed the original closing date, they would have to pay the seller $100 per day to extend the closing date. Their loan application had been in process for over 3 weeks… everything looked “fine”.

Their agent and loan officer had told them not to make any changes to their credit or finances until after closing.

What happened?

On his way to work, 5 days before closing, Sam had a car wreck. Sam was not familiar with the roads and ran a stop sign slamming into another car. Sam’s 8-year-old Honda had extensive front and driver side damage. Fortunately, no one was seriously injured. Sam and Sue decided to take advantage of the 0% car loan deals and get a new car in place of repairing their 8 year old, 100,000 mile, (wrecked) Honda. The payment was well within their budget at only $260 per month.

At 3:00 PM two days before closing, the FHA Investor did the pre-closing quality control update to the Spuds file and re-pulled the Spuds’ credit report. The new report showed the new car loan with a payment of $260 and a change to the Spuds’ credit scores. This change meant that the loan had to be redone and re-underwritten with the new credit score and new ratios!

The loan officer had to correct the computer system and all pages of the loan application and loan forms due to the changes. The interest rate lock had to be extended to prevent a change to the rate. An interest rate change would require a change to the GFE and cause an added three-day delay due to HERA laws. The processor had to update the loan submission documents and include the new car payment. The loan had to be re-run through the DU automated underwriting system. An entire new loan package had to be re-submitted to the FHA Investor. This meant it was placed back in line behind other loans to be underwritten. Average industry turn times are 48 to 72 hours for underwriting and then 24 to 48 hours for preparation of the closing package.

The Spuds missed their original closing date but their loan re-approved with the new car payment.  Had the payment been $56 more, their ratio would have been too high! Due to the delays, caused by the purchase of their new car, they closed three days late and had to pay $300 to the seller. Fortunately, this story still had a happy ending. The Spuds were able to buy a new home in Peachtree City for $250,000 at a rate of 4.5%.

Exact language from the new laws for pre-closing verification of borrower data:

“Effective with applications dated on or after June 1, 2010, information disclosed on the loan application must be accurate and current through loan closing. This information includes (but is not limited to) any additional credit applied for or incurred during the application process and through loan closing.” 

 HUD has determined that undisclosed debt during the mortgage loan application process is a leading cause of mortgage fraud and loan repurchases and foreclosure.   

“If any additional liabilities or an increase in existing credit is revealed during the loan application process, the Mortgage Lender is required to re-qualify the borrower based on this new information. Re-qualification may include, but is not limited to, obtaining a new credit report including an updated credit score which may impact the qualifying interest rate and pricing as well as the borrower’s ability to qualify based on current program guidelines.” 

“All lenders and borrowers are reminded that when the borrower signs the final loan application, they are verifying that all information in the application, including liabilities, are current and accurate and that if new debt is revealed, their loan may be subject to re-qualification and/or re-pricing. Approved HUD, FNMA and Freddie Mac Investors also reserve the right to stop funding altogether, if the borrower no longer meets loan program guidelines. Not reporting additional applications for credit or an increase in existing debt or change of their income or employment status to their loan officer or mortgage lender could be considered mortgage fraud.”

Stay tuned for the next Closing Killer story: “Appraised Value”!

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4 Responses to “Closing Killers: Opening New Credit”

  1. Arthur Harris Says:

    Great blog Judy. Once again we cannot emphasize enough that once prospective buyers are under contract any further loans, job changes etc should be communicated to lender as their loan could be subject to re-qualification and/or re-pricing.

  2. ann bone Says:

    What a potato-head! But of course everyone knows that spuds have lots of eyes, but apparently not enough ears to heed the LO’s advice.

  3. Gerard Dickson Says:

    Judy,
    This is a wonderful and timely article, especially since Fannie Mae and Freddie Mac investors adopted LQI, Loan Quality Initiatives, a few months ago. Keep it up.

  4. Britt Argo Says:

    Thanks for the update. Great tip to give our buyers. Those critical times from Loan App to closing should really be in “freeze mode” where clients avoid making any big financial changes–just in case.

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