Credit Standards Stiffen: What You Need to Know

Thinking about getting new furniture for the house you just bought? Or maybe you need a new car? You've already completed your mortgage application and your lender has already pulled your credit report, so why not start shopping?

Don't even consider it. Under new rules that take effect June 1 your lender will need to monitor your credit inquiries from the time you apply for the mortgage until the day of closing. While a credit report will still be good for 90 days, lenders that want to sell the loan to Fannie Mae have the obligation to monitor your credit activity until the day of closing.

Fannie Mae recommends a number of ways to do that:

  • Get a refreshed credit report just prior to the closing date. Review it for additional credit lines or inquiries.
  • Use one of the new borrower credit report monitoring services that will monitor a borrower's credit between the time of application and the time of closing.
  • Investigate whether a recent inquiry on the credit report did result in the borrower taking on new credit.
  • Use fraud detection tools to identify undisclosed mortgages or other obligations, such as liens.

Two new services already have been announced to help lenders track borrowers' credit activities from the time of application. One is being sold by Equifax and the second by Credit Plus. Don't even think about shopping until you've closed. The temptation can get too great, especially when you find the perfect bedroom or living room set.

I've always recommended to people that they halt any new credit activities for six months prior to a home purchase. Get a copy of their free credit reports from all three credit bureaus. Clean up any problems and let their credit score improve so they can get the best interest rate.

Remember, that interest rate will be one you'll pay for 30 years. Even a 0.5% increase in the rate you'll pay can add thousands over the life of the loan.

Now with these new provisions requiring lenders to track credit activity -- even credit inquiries -- until you close, it's even more important to be sure no new inquiries show up on your file. As a borrower you've always had the responsibility to report any changes to your employment, income, debt obligations or other financial circumstances during the application process. Now lenders will be taking that one step further and checking on you, especially when it comes to debt.

Lita Epstein has written more than 25 books, including "The Complete Idiot's Guide to Improving Your Credit Score" and "The 250 Questions Everyone Should Ask About Buying Foreclosures."
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