LQI: Potential Closing Killer

The very first time I sit down to council my Home Buyer clients, one of the very first subjects we discuss is the closing process. During that discussion I always advise my clients to avoid purchasing any big ticket items such as washers, dryers, refrigerators, motorcycles, cars, whatever. Typically, the Lender too always advises Buyers NOT to make any purchases or open any new credit during the mortgage process.

Unfortuneately, many home buyers don't listen. What home buyers need to understand is their credit and purchase history will be highly scrutinized by underwriting throughout the process and from the time they apply for a mortgage through the day of closing. There must be a paper trail for every purchase and if the paper trail ultimately affects your buying power to purchase a home you will be disqualified from the purchase process. It happens every day.

So, as a result, just when Realtor's and Lenders are thinking that the underwriting process and scrutiny couldn't get any worse, Fannie Mae and Freddie Mac have now implemented a new rule effective June 1, 2010. The rule is called LQI (Loan Quality Initiative). Fortunately, this new rule only applies to Conventional Loans. However, FHA and VA have not yet indicated whether or not they will also adapt this new rule to their mortgage guidelines.

Home buyers could now find their closing stopped the day of closing if they make ANY new purchases or changes to their credit, income or assets after they make the loan application. The LQI rules require Lenders to re-check all the borrower's data to ensure that there have been NO CHANGES since the original loan application.

The actual rule states that all Lenders must determine that borrower liabilities incurred up to and concurrent with closing are disclosed and evaluated in qualifying the borrower for the loan. Lenders know that the best way to do this is to run an additional credit report right before closing. Lenders will be taking a close look at each file to ensure the borrower's occupancy status of the property is correct. Social Security numbers are filed with the IRS tax returns will also be closely reviewed.

Lenders are utilizing a new credit report called a "Comparison Report" which quickly and easily highlights changes between the qualifying report and the new refreshed report.

Any changes -- even minor ones, could result in a closing delay, pricing adjustment or worse, loan approval being withdrawn all together and at the very last minute before closing.

Fannie Mae's LQI mandates are already in place, and the best advice to borrower's is NO SPENDING BEFORE CLOSING, PERIOD.

If you have any questions about the Loan Quality Initiative, please contact me at 770-399-8108 or sara.hibbard@metrobrokers.com. I look forward to working with during your quest to home-ownership and guiding you throughout the entire process.