Though there are systems in place to check if there have been inquiries into your credit health, and ways to see if there have been new lines opened, a full, formal report does not need to be pulled.

Buyers still should not open lines of credit, because there are still checks & balances. The reason for these last minute verifications is due to, according to an article in the Washington Post and 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, according to the credit bureau. Those loan accounts had average balances of $361 per month — more than enough to disqualify many borrowers on maximum debt-to-income ratio standards required by Fannie Mae, Freddie Mac and major lenders.

These could disqualify the buyer from being able to qualify for their mortgage, which would leave them unable to get a loan to buy their house.

In May, Fannie Mae had announced that they were going to do last minute credit checks, but have now decided the full report is unecessary.

Fannie Mae homebuyers need to ensure that they are upfront and aware of all credit lines they have open — and not open new ones from the time of application until after they buy their new house!

This is an option for people who want to stay in their homes but cannot afford to keep them. For many Baltimore homeowners, this may be a viable option.

What happens in this case is that the bank agrees to a “Deed-in-Lieu of Foreclosure”. The bank essentially buys the house back from the current owner, and rents it back to them for a period of a year or so. The good news is that the lease amount is based on rental amounts in the area — not on the mortgage payment the owner had before.

The Deed-for-Lease option is for Fannie Mae owned loans. They state on their “Know Your Options” website that:

Deed-for-Lease is an alternative to foreclosure and may be an option if:

• You are ineligible to refinance or modify your mortgage
• You are facing a long-term hardship
• You are several months behind on your mortgage payments
• You may owe more on your home than it’s worth
• You have not been able to sell your home
• You want to remain in your home and neighborhood

If you are trying to prevent foreclosure, then this may be an alternative for you. Another choice which could possibly cause less credit implications could be a short sale.

Please contact me to avoid foreclosure in Baltimore. There may be multiple options for you!

Though I tell my clients not to go open lines of credit before settlement, because I know many times there is a spot check, this is a new policy that could affect many loan applicants. The purpose is to find out whether the borrower has accrued or shopped for new debt.

Many homebuyers get excited once they have an accepted contract on a home, and realize they will need new furniture and decorations for the house. What some do not realize is that they should not open an account at a store or make these large purchases because they effect their debt-to-income ratios for their loan.

Now, if a Fannie Mae homebuyer does this, they risk a delay in settlement as the lender does more research and reviews the file further, creating problems for themselves and the sellers of the house they are buying.

The Washington Post reported on this new policy, and make a few notable points.

Fannie’s “loan quality initiative” will require lenders not only to pull two credit reports for each mortgage transaction but to perform additional verifications of borrower occupancy plans for the property, Social Security numbers and Individual Taxpayer Identification Numbers.

Essentially, to ensure you get your dream home and close on the house, DO NOT open or apply for ANY lines of credit from the time you make loan application and closing. That is the only safe route!

Prior to this change, the lowest credit score a borrower could have for this type of loan was 580. The new lowest score is 620. This is not negotiable, even if you are putting 20% down!

The other change is that the maximum debt ratio for this same 20% down borrower cannot be more than 45% of their income in order to qualify for the loan. Again, this is not negotiable.

Fannie Mae is a government controlled finance company who provides many of the mortgages offered to buyers through lending institutions. Part of the reason that these new requirements cannot be changed is that it uses an automated system to qualify or reject, so it is not a human making those decisions.

Fannie Mae made these determinations after studying what types of borrowers have been most defaulting on their loans. In this Reuters article, spokesperson Brian Faith had this to say:

“Loans to people with credit scores below 620 fell seriously behind at a rate approximately nine times higher than other loans purchased in the same period, Fannie Mae spokesman Brian Faith said. Loans taken out by borrowers with lots of debt also suffer higher levels of serious delinquency, he said.”

So what does this mean for the Towson homebuyer? If you are getting a conventional loan, you must have at least a 620 credit score and only 45% debt-to-income ratio.

Please note this does NOT affect FHA home loans or loans not provided by Fannie Mae, though as T. Jeremy Loomis of Wells Fargo Home Mortgage notes, Freddie Mac tends to follow Fannie Mae’s policies very quickly, so he expects to see these changes come through there soon, with most other institutions following their lead.

I want to thank Jeremy for this information, as he provided this to a large group of REALTORS(R) in his Continuing Education Course at the Greater Baltimore Board of REALTORS(R) earlier this week. Please also note, many lending institutions have already instituted this new policy to be in compliance for loans closing after December 12, 2009.

What’s the deal? Primary and investment properties qualify (no limit to amount of properties owned). You can refi up to 105% LTV with NO mortgage insurance.

Why? This initiative is part of the Making Home Affordable program announced on March 4, 2009. According to the Fannie Mae website:

The goal of the refinance initiative, as announced by the President, is “to provide access to low-cost refinancing for responsible homeowners suffering from falling home prices.”

How do you know if you have a qualifying loan? You can check your qualifications right on the Making Home Affordable site, or call Tasha right away at 443-992-0783.

So what’s the catch? Well, you get limited cash out (which, in this market/economy makes sense). Also you must presently have no mortgage insurance. It is also currently only available until July 2009!

This is a great opportunity for those that have adjustable rate mortgages or interest only loans. This opportunity is not just for Baltimore homeowners, it is all over the US.

So take advantage if you are eligible. Here is YOUR bailout for being a conscientious homeowner!