Doron F. Eghbali Residential Real Estate Law Blog on Lawyers.com

In this still relatively frozen credit market, you would be fortunate to be approved for a mortgage. However, Fannie Mae on June 1, 2010 put into effect new strict standards in the form of Quality Loan Initiative (QLI) that encourage your lender to conduct another credit report check on you just hours before closing. The second credit report could scuttle the deal and cost you your earnest money. Let us review this development and explore how to forestall such evenuality.

SOME BACKGROUND

Fannie Mae is a semi-governmental entity that lends to mortgage lenders. Fannie Mae, then, purchases such loans from the lenders and to some extent guarantees them. This mechanism puts a lot of pressure on Fannie Mae - since the subprime mortgage - to ensure mortgage borrowers are able to repay such loans and lenders do not underwrite bad loans.

Now, since June 1, 2010, Fannie Mae has launched a new program called Loan Quality Initiative (LQI). As part of the LQI, Fannie Mae requires any lender that sells its morgages to Fannie Mae to determine that "borrower liabilities incurred up to, and concurrent with, closing are disclosed and evaluated in qualifying the borrower for the loan."

However, how lenders should implement such provision is unclear and enforcement mechanism has been left to lenders. Nontheless, in many cases this entails fresh borrower credit reports just before closing.

Accordingly, this behooves borrowers to know what problem areas exist and how to forstall them.

1. DEBT-TO-INCOME RATIO NOT OVER 45%

This is very important to understand what debt-to-income ratio is and how that seriously affects mortgage approval. Debt-to-income ratio refers to the percentage of your monthly gross income used to pay your monthly debts. Currently, Fannie Mae has a threshold of 45% debt-to-income ratio. This means a morgage borrower with gross monthly income of $10,000 cannot have debt liabilities incuding mortgage payments that exceeds $4,500 (i.e. of the $10,000).

Thus, if the borrower is approved for mortgage, but from the time of approval to closing refinances a car for $300 that puts the debt-to-income ratio above 45%, then a new credit report would scuttle the deal, as the lender would not go through with the mortgage.

2. CREDIT SCORE INQUIRY NOT DURING THE CLOSING PERIOD

Another important yet subtle challenge would be if you do not take on any debt, yet your credit score plunges because of credit inquiries or late payments. So, this is very important to ensure to pay all your bills on time and do not even inquire for any debt financing of any sort, whether that is a TV, washing machine or an iPod.

3. POTENTIAL LOSS OF DEPOSIT BECAUSE OF DELAY OR DENIAL OF LOAN

Many residential purchase and sale agreements would cause you to lose your deposit if your loan is denied at the last minute.

Such agreements include a scheduled closing date. Thus, if there is a delay and the borrower cannot deliver the puchase mney on the assigned date, the seller may keep the deposit.

BOTTOM LINE

Simply, do not think about anything that would require any credit inquiry or worse debt accumulation during the time from your mortgage approval to closing.

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DORON EGHBALI is a Partner at the Beverly Hills Offices of Law Advocate Group, LLP. He Primarily Practices Business, Real Estate and Entertainment Law. Doron Can Be Reached at: 310-651-3065. For More Information, Please, Visit: HERE.