Everything is going smoothly. You’ve saved a down payment for what seems like ages, found a home you love in your budget, taken good care of your FICO score, and been pre-approved for your loan, and opened escrow. Now, it’s 21-30 days later and your loan is declined. Why?
The reason is tighter credit standards. Fannie Mae, Freddie Mac and most other Mortgage Lenders have a policy of re running your credit report immediately before authorizing that the new mortgage be funded to confirm that you are still in good standing and that no other credit has been opened. If your score has dropped or new debts are found, the mortgage is subject to a re-underwrite and a possible decline.
The underwriters will be looking for three things in particular — even after your loan is approved.
First, your updated credit report will show your current credit card bills and minimum monthly payments. Those numbers will replace your original numbers made at the time of application. If the debts exceed a certain threshold your loan may be declined.
Second, underwriters will be looking at your updated credit score. If you’re credit score has dropped below minimum lending standards, your loan may be declined. OR, may be subject to a “loan–level pricing adjustment” which could increase your interest rate and/or points. Loan-level pricing adjustments are required by Fannie Mae and Freddie Mac and are based on your credit score in relation to your down payment. Generally, middle credit scores greater than or equal to 740 do not incur these adjustments.
And, lastly, underwriters will be looking at your credit report’s Credit Inquiry section. The goal is to see if you have been applying for credit elsewhere. Underwriters can use this information at their discretion. Please note that Inquires can bring your score down so it is advised that you do not allow anyone to run your credit report until after you have closed your loan.
So what can you do? You need to take extra care of your credit between the time of application and the time of closing. Don’t buy new cars, don’t buy new appliances and — most definitely — don’t open new credit obligations OR close existing credit. Be extra safe with your credit because there is a possibility that the mortgage application that’s supposedly cleared-to-close can be revoked at the eleventh hour.