Don't go buy that new furniture just yet!

When soon to be new home owners find out that their mortgage application is not only approved, but clear to close, they think they’re in the clear for having inquiries on their credit report and/or obtaining new accounts.  Often, a new account will be something like a large furniture or appliance store, or worse, that new car you wanted to buy prior to applying for a mortgage.  What you may not be aware of is, the lender will be pulling your credit report again, just before closing.  It’s part of a process called the “Loan Quality Initiative”  so the report is commonly referred to as an “LQ” in the industry.

The initiative was designed to ensure that loans that go to closing are of the highest quality.  Higher quality loans means less bad loans down the road and less burden on the tax payers.  It also helps to keep interest rates lower, since there is a lesser need to recoup lost revenue on the part of Fannie Mae or Freddie Mac, who are securitizing these loans.

So what do you, as a consumer, need to be aware of and practice as a mortgage applicant? Easy, don’t run up any new debt or even inquire into it until you’ve closed your loan.  A credit inquiry on your LQ will result in your lender asking for a letter stating why your credit was pulled and that you haven’t actually been granted new credit.  You also want to make sure that you don’t actively use your existing credit and increase the balances, or more importantly, the minimum monthly payment.  Significant changes to your credit profile or amount of your monthly liabilities can turn an approval into a denial.  The LQ will provide information on any changes in your budget and when the numbers are recalculated by an underwriter, if there is new or increased liability on the part of the borrower, the debt ratios will increase and if they go over the maximum allowed by the guidelines of the loan you’ve applied for, your approval will be switched to a denial.

The best thing to do is simply be extra careful with your credit during the loan process.  Waiting just a few days to make that big purchase will only ensure that your loan stays approved, and this goes for a refinance as well.