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Keep Your Credit Score Intact Before Settlement

By Michele Lerner

Whether you are a homebuyer or a property investor, a new initiative put in place June 1, 2010 could impact your reaching the settlement table if you're buying an investment property. Fannie Mae’s Loan Quality Initiative encourages lenders to do a second check on the borrower’s credit score and debt-to-income ratio within a day or two of a mortgage loan closing. Yes, lenders want to double check your credit score standing right before closing.

In the past, many borrowers expected that once they were approved for a mortgage loan and locked in the rate, their worries were over. Now many lenders have become more cautious and require mortgage applicants to have a second credit report pulled between the initial approval and settlement.

Fannie Mae’s researchers discovered that one of the strongest indicators of a loan default occurred when mortgage borrowers applied for additional credit or spent new credit during the 30 or 60-day period between approval and closing on a loan.

While many investors and homebuyers are cautious about their spending in anticipation of the home purchase, others opt to apply for new credit at a home improvement center or furniture store to pay for appliances or decorative items for the new property. Others decide a new car is needed to park in their new driveway. The added burden of these expenses could cause budget problems once the new payment schedule begins.

Lenders recommend that borrowers today keep all spending to an absolute minimum while waiting for their loan settlement date and that they refrain from applying for any new credit. While paying your bills on time may seem obvious, it is particularly important during this time, when your finances will be scrutinized by the loan underwriter more than once.

Applying for new credit or making a major expenditure could reduce your credit score and can change your debt-to-income ratio, two important factors in your loan approval. If either of those factors changes before your settlement date, you should expect your lender to need to reevaluate your loan. The best case scenario is a delayed settlement, which could cost you money and time in terms of rescheduling movers or other contractors. The worst case scenario is that you no longer qualify for your loan and must start the application process over for another loan or be unable to qualify at all.

For investors, this “second check” means that they may not be able to purchase more than one property or make significant expenditures on another property during the period between a loan approval and settlement. Discuss your individual circumstances with your lender if this is a concern.
The bottom line for all mortgage applicants is that maintaining your credit score and your debt-to-income ratio prior to settlement date should be of paramount importance. Shopping will have to wait.

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Michele Lerner, a real estate expert and freelance writer with 20 years of experience, is the author of “HOMEBUYING: Tough Times, First Time, Any Time”.


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