You can call it Big Brother. You can call it high-tech snooping. But be aware: If you are applying for a mortgage in the coming weeks, you can be sure that your credit will be checked and rechecked — possibly monitored daily — to make certain no hints of new debts pop up before you close on the loan.
Just as the federal monitoring of phone traffic that has been in the headlines lately was a direct outgrowth of the attacks of Sept. 11, 2001, pre-closing credit monitoring is a byproduct of the housing crash. Lenders are terrified of being forced to “buy back” loans from investors Fannie Mae or Freddie Mac because borrowers had more debts than they disclosed at the time of application.
As a result, virtually all banks and mortgage companies use some form of commercially available program to keep tabs on credit files between the date of your loan application and your settlement. One of the three national credit bureaus, Equifax, offers a popular service that monitors applicants around the clock and can detect even subtle hints that a home purchaser is planning to add on new debt before the closing.
Say your mortgage application was just approved. In the documents, you laid out all your credit obligations and just barely passed the lender’s crucial debt-to-income ratio test. You’re feeling upbeat about the prospect of moving to a new home, and you start thinking of things you need to buy: Furniture for the living and family rooms. New beds. TVs. Audio equipment.
So you visit a couple of stores and take up their offers for low-interest-rate credit lines. You apply for what could come to as much as $14,000 worth of new debt, all to be paid off monthly.
Ping! In Equifax’s computer maze, your credit inquiries to merchants trigger alerts. Your lender or mortgage broker is notified immediately that you are pursuing additional credit. And in this case, that $14,000 in potential new payment obligations could knock your debt-to-income ratio over the cliff.
Lenders say that clients can mess up transactions in all sorts of ways. Annie Austin, a senior loan officer with Cobalt Mortgage in Bellevue, Wash., says one borrower went out and bought a new Porsche on credit after getting his loan application approved, despite warnings not to incur new debt before closing.
Paul Skeens, president of Colonial Mortgage Group in Waldorf, says that although he hands a prudent “do not do this” list to every applicant, some borrowers ignore it or forget that they’ve got credit-related situations they never disclosed, such as co-signed student loans, applications for overdraft coverage on checking accounts, or even that the down payment cash they claimed as their own was actually lent to them by someone else and must be repaid. One borrower, Skeens recalled, had received home purchase money on the side from a “loan club” that would require $600 a month to pay off. Oops!
According to Equifax Vice President Raymond White, undisclosed debts — or fresh inquiries for additional credit never disclosed to the lender — now turn up in nearly one out of five mortgage applications. Yet under Fannie Mae and Freddie Mac rules, any increase in the total debt-to-income ratio of more than three percentage points or any change that pushes the ratio beyond 45 percent can put the lender into a vulnerable position. If the mortgage later goes bad, Fannie and Freddie can force the lender to buy it back — and that’s financial torture for any bank.
White says that failure to disclose debts on mortgage applications is an equal opportunity problem, seen in all market segments, including well-off borrowers who have excellent credit. Research by Equifax found that people with high credit scores are significantly more likely to have undisclosed debts — or new credit obligations in the works before settlement — than other categories of applicants.
“The higher the FICO score you have,” said White in an interview, “the more likely you are to buy something” that triggers an alert (or to apply for new credit) .
It’s counterintuitive, he agrees, and it’s probably because consumers with higher FICOs feel more confident about their credit and may have more resources to handle new debts. But inquiry pings from auto or boat dealers can still mess up home purchases or refinancings.
Bottom line: From application to closing, don’t shop for new credit. It’s entirely possible someone is watching. And you are suddenly a person of interest.
Ken Harney’s e-mail address is firstname.lastname@example.org.