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Don’t apply for new credit before your mortgage closes

By Holden Lewis ·
Wednesday, May 5, 2010
Posted: 9 am ET

Don't apply for new credit between the time you apply for a home loan and the day the mortgage closes. The price of ignoring this advice: You could be turned down for the loan while you're sitting at the closing table.

Fannie Mae has a new rule that goes into effect June 1. It requires lenders to check your credit report right before closing. A lot of lenders are going to interpret that as "the day of closing." And if you took on a new credit obligation, the lender has to recalculate your debt-to-income ratios. You could be turned down for the mortgage at the last hour if your debt-to-income ratio exceeds Fannie's guidelines.

Say you got a Home Depot charge card a week before closing, and bought a lawn mower. And you got a new Sears card and bought a washer and dryer and a refrigerator. You know, the necessities. Buying those things on credit could torpedo the mortgage.

According to a Fannie bulletin issued in March, Fannie Mae "directs the lender to review and evaluate the 'inquiries' section of the borrower's credit report to determine if the borrower has received additional credit that is not reflected in the credit report or disclosed on the loan application. If additional credit was obtained, a verification of that debt must be provided and the borrower must be qualified with the monthly payment."

For years, mortgage lenders have pleaded with borrowers to refrain from getting car loans or applying for store charge cards or credit cards between the time they apply for a mortgage and the day they are approved. Now lenders are begging borrowers to wait beyond loan approval and all the way until closing day.

Brian Koss, chief storyteller and managing partner of Mortgage Network, a lender based in Danvers, Mass., advises: "Once you start the process, don't touch a thing. Freeze the time." Don't apply for new credit, and just to be safe, don't close any accounts, either. Don't change employers, and don't switch from a salaried position to a commission-based job.

I invite homeowners, loan officers and brokers to offer tips or advice on this subject in the comments.

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Lanie Lenz
May 23, 2010 at 3:54 pm

Even spending large amounts of money for expensive auto or home repairs, big ticket items for that new home, and unrelated to credit, however.. important, do not leave a job for any reason, if it is in your control.

There is usually about a week before a home buying transaction closes that is referred to as 'clear to close,' here in the east coast.. The information gleaned during the week before is critical and if it isn't up to par, could cost you your mortgage.

May 18, 2010 at 6:05 pm

Please check your information again. A Fannie Mae update on May 12th indicates that... Fannie Mae has not changed the policy as it relates to credit reports. Credit documents, including the credit report, are valid for 90 days from the date of the report and may not be older than 90 days at time of closing.
Lenders must take steps to proactively identify any and all undisclosed liabilities that may affect the loan approval in relation to underwriting guidelines, eligibility parameters, or pricing.

May 17, 2010 at 10:49 pm

Hey guys!I heard that it can affect you. Somebody didn't get a loan under the same interest rate because that second inquiry that they made her do fell out of the window and if I remember correctly I don't even think she got a loan. I remember reading that months ago and was PISSED!!!!!!!!!!!!!!!!!!!! So I feel like they are trying to sabatage us at least interest rate wise. That is why they say make sure your credit is extra good so that the difference won't hurt you.

Barak Volner
May 16, 2010 at 10:50 pm

We shall see.

Holden Lewis
May 10, 2010 at 4:30 pm

Debra asks good questions. Do any readers know the answers? Is the lender's last-hour credit check a hard or soft inquiry? How does it affect the credit score?

From what I understand, the lender doesn't check the credit score on the last-hour inquiry, but checks only for recent credit inquiries.

Debra James
May 10, 2010 at 3:37 pm

I am curious to know how this second credit inquiry by the lender affects your credit score, because more than likely it will be outside of the "mortgage shopping" window that counts multiple inquiries of this type as a singular incident. Will these follow inquiries be hard or soft credit checks, or will there be another category for these inquiry types? Lenders know that each credit check knocks points off of your score that can take a few billing cycles to recover. It seems to me that they are purposely trying to hinder you from obtaining new credit even after you have closed on escrow.

Holden Lewis
May 06, 2010 at 9:34 am

Fannie is telling lenders to look for credit inquiries, not new credit lines. And credit inquiries show up immediately. Dan Green, mortgage planner for Waterstone Mortgage in Cincinnati, tells me that he can look at a credit report and see that the customer applied with another mortgage company the previous day.

When a recent credit inquiry shows up, Fannie requires mortgage lenders to find out if the inquiry resulted in a new account, and to recalculate the borrower's debt-to-income ratio. In some cases, a $75-a-month difference could cause problems with mortgage qualification. That probably won't be the case with you, but it's a good idea to tell your loan officer about your plans when you're applying for the home loan. The loan officer can run the numbers to see if you'll be OK.

Mortgage lenders don't want you to touch your credit profile while the loan is pending, but they also understand that sometimes the timing is imposed on you, rather than the other way around.

May 05, 2010 at 2:38 pm

How long does it typically take for a new credit line to appear on your credit report? If you were to get a new car (lease) weeks before you were to apply for a mortgage and the tradeline doesn't show up on your credit report at that time, what do you suggest? I'm in the process of looking for a new home and plan on applying for a mtg in the coming months and within that same time period, i plan on getting a new car. My current lease is up... the payment differential shouldn't be more than 75/month. Anything to be concerned about?