Don’t apply for new credit before your mortgage closes

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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.