WASHINGTON - Clarifying a policy announced this year, mortgage giant Fannie Mae says applicants will need to come clean about any debts they've incurred since submitting their mortgage applications - or debts not disclosed during the application.
But a formal pre-closing credit report will not be mandatory to confirm their creditworthiness.
Instead, loan officers can use other techniques to verify that an applicant hasn't financed a car, taken out a personal loan, or applied for new credit in any amount that might increase the difficulty of making monthly mortgage payments.
Among the techniques Fannie expects lenders to use on all applicants: fraud-detection systems that have the capability of tracking an applicant's credit file from the day a loan request is approved to the moment of closing.
Although Fannie made no reference to specific services in its recent clarification letter to lenders, some commercially available programs claim to be able to monitor credit activities around the clock, flagging such things as inquiries, new credit accounts, and previous accounts that did not show up on the credit report pulled at the time of application.
According to national credit bureau Equifax, home-loan applicants failed to mention - or loan officers failed to detect - "up to $142 million in auto loan payments" during mortgage underwriting in first mortgage files reviewed by Equifax last year alone.
Those loan accounts had average balances of $361 a month - more than enough to disqualify many borrowers on maximum debt-to-income ratio standards imposed by Fannie Mae, Freddie Mac, and major lenders.
Why the sudden concern about debts incurred after mortgage applications?
Some buyers and refinancers hold off on opening new credit accounts until they've been approved for a mortgage.
Had those new accounts been present on their credit files at application, borrowers might have been turned down for the mortgage or required to make a larger down payment or pay a higher interest rate.
Fannie's new policy puts the burden of detecting these debts squarely on lenders' or loan officers' shoulders. If the debt loads stated in any mortgage package submitted for purchase by Fannie Mae are not scrupulously accurate as of the moment of final closing, the lender is likely to be forced to buy back the entire mortgage from Fannie Mae.
Fannie Mae and Freddie Mac have demanded billions of dollars in buybacks this year alone - a fact that is likely to make lenders even more eager to conduct some type of refresher credit check or continuous monitoring of all applicants.
Potential applicants for a loan for a home purchase or for refinancing an existing mortgage should be aware that sophisticated new credit surveillance systems are being placed into operation.
They should try not to inquire about, shop for, or take on new credit obligations during the period between the home-loan application and the scheduled closing.