More FNMA Changes Necessitate Diligence by Lenders, Realtors, AND Borrowers

(Originally published September 19, 2010.)

A number of weeks ago, I informed you about recent Fannie Mae changes requiring a second credit check before closing. (Click here to read, Don’t Buy That New Furniture Yet! FNMA Requiring SECOND Credit Check Before Closing.)

As required by FNMA’s Loan Quality Initiative, lenders are tightening up on other aspects of the underwriting process.

• INQUIRIES – Borrowers have always been required to address recent inquiries on their credit report in order to confirm that no additional credit obligations have been incurred. However, some lenders are interpreting these new FNMA guidelines rather harshly and will require borrowers to prove the sources of these inquiries. Prove??  How???  It will be the Underwriter’s discretion to decide.

And if, heaven forbid, a new account was opened, a verification of the debt must be provided. Plus, the borrower must qualify with the new creditor’s monthly payment included. OK. No news there. But how should the new liability be verified?  According to FNMA, the verification can be obtained through “direct contact with the creditor or use of a credit supplement.”

Bottom Line: Borrowers incurring more costs for a credit supplement, or time wasted on the phone with some minimum wage customer service rep, trying to get an official letter from the creditor.

• ASSETS – Recent large deposits into a borrower’s bank account have always been a red flag. Lenders must ensure no other funds (besides the mortgage applied for) have been borrowed. In addition, since the Patriot Act was passed in 2001, lenders must verify deposits are from legitimate sources. An industry benchmark definition of a “large deposit” has typically been a deposit greater than one month of net pay. However, this is now also subject to an underwriter’s discretion. Recently, I witnessed an underwriter question and torture a borrower to document the deposit of a $300 wedding gift from Aunt Ethel. I wish I was kidding.

Bottom Line:  Borrowers anticipating a mortgage application within the next three months should be aware of – and be ready to paper-trail if necessary – all deposits into their bank accounts.

• OCCUPANCY REQUIREMENTS – FNMA has experienced a considerable amount of fraud regarding borrowers claiming a purchase would be their primary residence, when in fact it would not be. Therefore, for owner-occupied purchases, some lenders plan to require documentation that confirms the applicant intends to occupy the property as their primary residence. Explanation letters from the borrower will not be acceptable as sole proof.

Bottom Line: This potential issue is better prevented than cured. Borrowers must work with a competent mortgage professional so that their loan is structured in such a way that this question is never raised by an underwriter.

With guidelines and industry dynamics ever changing, it’s now more important than ever to have a quality team of advisors to guide you. Make sure your team includes a professional, knowledgeable, and competent Mortgage Planner, Realtor, and Real Estate Attorney. Otherwise your quest for a dream home could turn into a nightmare.

Since 1992, Warren Goldberg has helped thousands of clients own their homes, refinance their mortgages, restructure their debts, and invest in real estate. Warren is known for his wide knowledge of mortgage products and wealth-creation strategies.