LQI: The Potential Kiss of Death for On-Time Closings

If you're planning on getting a mortgage to purchase a home or for a refinance, please do not obtain ANY credit, increase your credit debts (use your credit accounts) or please don't even THINK of applying for new credit until your new mortgage loan has funded and closed.   Why hold off on shopping for your new fridge or washer and dryer that you're going to need or that new sofa from Pottery Barn?   Because it could delay your funding (i.e. closing) or worse–it could disqualify you for your loan (kill your deal) right when you're expecting your transaction to close!

Fannie Mae has created Loan Quality Initiative (LQI).  According to Fannie Mae, LQI is intended to prevent mortgage lenders from having to buy-back mortgages by increasing the quality of the loan that is being sold to Fannie Mae.   LQI addresses more than undisclosed debts on the loan application, including occupancy and borrower identification issues.  However in my opinion, the re-verification of credit prior to funding has the potential to impact a transaction more often.

LQI requires that if new debt is discovered when the credit is reviewed, that it be disclosed on the final application.  New debt is not limited to a new credit card you used to purchase appliances, it could be that you made a charge on an existing credit card that increased your monthly payment.   Maybe you simply filled up your gas tank at $3.00 a gallon…this could possibly trigger a delay in a transaction closing if the borrower has higher debt-to-income ratios or average credit scores.  If new debt or inquires are discovered just prior to funding, the loan may have to be sent to underwriting again to include the new debts payments. 

Most lenders are doing "soft pulls" on the credit (without the credit score) also referred to as a credit "refresh".   However, if new debt is discovered and the loan is sent back to underwriting, a new full credit report may be pulled.   If the borrowers mid-credit scores have dropped, this may impact qualifying and possibly the interest rate since conforming rates are based on credit scores.  Not so refreshing, is it?

So if you are considering buying a home or refinancing, please do not:

• apply for any credit or loans after you've completed a loan application;
• use your credit cards during the transaction (increasing your borrowed amount on your credit line);
• pay off or close any debts during your transaction without first speaking to your mortgage originator (this can actually drop your credit score).

As tempting as it might be to purchase your fridge (or what ever) so it's ready for your new home when you move in–please don't!!  It may cause a delay in your closing or cost your mortgage approval and at this point in the transaction, your financing contingency is most likely waived! 

I understand Fannie Mae wanting higher quality loans and that the loan application should reflect the borrower.   However everyone knows that the day after closing, the new home owner is probably going to purchase some new appliances and maybe make a trip or two to Pottery Barn or Restoration Hardware.  This is a classic example of how the underwriting pendulum is swinging too far.  I can tell you that my typical client today is more qualified than those of the subprime era, our current guidelines alone (pre-LQI) have done this.  NOTE:  Please be responsible whenever using credit…especially after just taking on the largest debts you may have in your lifetime: a mortgage.

PS:  Real Estate Agents:  please be sure to make your buyers aware of this newer policy.

Photo credit: Rob Young via Flickr