New debt could pose threat to closings

Some homebuyers may be shocked to discover they’ve lost their mortgage commitment after making a major purchase prior to closing – or at least that’s the story that’s appearing on a number of real estate blogs.

Fannie Mae announced changes to its Selling Guide as part of its Loan Quality Initiative earlier this year. This update requires lenders to determine that all the homebuyer’s debts are disclosed on the final loan application. If the borrower takes on more debt before the closing, the lender should update its underwriting. If it fails to do so, it may be required to buy back the mortgage. In response, many lenders are expected to run a second credit check prior to closing.

“It seems clear that the purpose of the policy is to make sure that homebuyers don’t take on more debt than they can afford which, of course, would increase the likelihood that they may default,” said Jeff Lischer, National Association of REALTORS® (NAR) managing director for regulatory policy.

“REALTORS® may wish to counsel their clients about the risk of taking on additional risk, especially before they close on their home and get a good understanding of the costs involved in owning a home,” he added. “Any debt taken after the loan approval but before closing could put the closing at risk.”

“This isn’t anything new,” said former banker and PAR President Don Roth. “Lenders can always call the credit bureau or the buyer’s employer to confirm the credit situation. I think many may have moved away from the practice several years ago,” he said.

Roth said it’s always a good idea to remind buyers of this possibility, especially first-timer homebuyers. “This is a reminder to the buying public not to apply for another credit card or buy a car before closing. Lenders were always able to verify credit or employment. It’s just becoming more commonplace today for them to run a check a few days before closing,” he added.