WASHINGTON — You can call it Big Brother. You can call it high-tech snooping. But be aware: If you are applying for a mortgage in the coming weeks, you can be sure that your credit will be checked and re-checked — possibly monitored daily — to make certain no hints of new debts pop up before you close on the loan.
Just as the federal monitoring of phone traffic that's been in the headlines lately was a direct outgrowth of 9/11, pre-closing credit monitoring is a byproduct of the housing crash. Lenders are terrified of being forced to “buy back” loans from investors Fannie Mae or Freddie Mac because borrowers had more debts than they disclosed at the time of application.
As a result, virtually all banks and mortgage companies now use some form of commercially available program to keep tabs on credit files between the date of your loan application to your settlement. One of the three national credit bureaus, Equifax, offers a popular service that monitors applicants 24/7 and can detect even subtle hints that a home purchaser is planning to add on new debt before the closing.
Say your mortgage application was just approved. In the documents you laid out all your credit obligations and just barely passed the lender's crucial “debt-to-income” ratio test. You're feeling upbeat about the prospect of moving to a new home and you start thinking of things you need to buy: Furniture for the living and family rooms. New beds. TVs. Audio equipment.
So you visit a couple of stores and take up their offers for low-interest-rate credit lines. You apply for what could come to as much as $14,000 worth of new debt, all to be paid off monthly.
Ping! In Equifax's computer maze, your credit “inquiries” to merchants trigger alerts. Your lender or mortgage broker is notified immediately that you are pursuing additional credit. And in this case, that $14,000 in potential new payment obligations could knock your debt-to-income ratio over the cliff.
Lenders say clients can mess up transactions in all sorts of ways. Annie Austin, a senior loan officer with Cobalt Mortgage in Bellevue, Wash., said one borrower went out and bought a new Porsche on credit after getting his loan application approved, despite warnings not to incur new debt before closing.
Paul Skeens, president of Colonial Mortgage Group in Waldorf, Md., said that although he hands a prudent “do not do this” list to every applicant, some borrowers ignore it or forget that they've got credit-related situations they never disclosed, such as co-signed student loans, applications for overdraft coverage on checking accounts, or even that the down payment cash they claimed as their own was actually lent to them by someone else and must be repaid.