If you’re qualified for a conforming loan, there’s important information you need to know. You can qualify and still be turned down.
A conforming loan meets guidelines required by the secondary market that purchases the loans to package into securities. In other words, the bank loans you money. It sells your loan to entities that buy loan packages. It uses the money it receives to make new loans, keeping the lending market fluid.
The result? Conforming loan requirements got stricter. The Federal Housing Finance Agency created the Uniform Mortgage Data Program to improve the screening of mortgage loans sold to Fannie Mae and Freddie Mac.
New loan standards were implemented under Fannie Mae’sLoan Quality Initiative (LQI), a means of collecting updated electronic appraisal and loan data. While the compliance requirements are directed toward banks and appraisers, consumers are also impacted.
The LQI requires lenders to comply with stricter credit and eligibility standards, pricing guidelines and other criteria to meet Fannie Mae’s Selling Guide, or conforming standards.
If a loan doesn’t conform to Fannie Mae’s guidelines, the bank is unable to sell it, and the loan stays on the bank’s books, severely limiting the bank’s ability to make new loans.
If the bank can’t sell the loan, it doesn’t want to make the loan. That’s why it can cancel your “pre-approval” anytime without warning. Innocent actions on your part may disqualify you from the loan you thought you were qualified to receive.
For example, you may get a loan approval for a certain amount, but then you decide to buy new furniture to go in your new house. But that purchase could cause your credit score to dip just enough to put you outside of conforming income-to-debt ratios.
How does the bank know you bought furniture? It pulls your credit reports and scores. The bank has to do this before Fannie Mae catches any “undisclosed liabilities” or discrepancies with the LQI electronic data processing and refuses to buy the loan. That means banks will retrieve your credit reports twice – once to okay the loan, and again to make sure you still quality for a conforming loan.
The bank can also run a Mortgage Electronic Registration System (MERS®) report to determine if the borrower has undisclosed liens or if another mortgage is being established simultaneously. For the bank to be certain about you, it runs all three credit bureau reports and credit scores, when it may have only run one report to preapprove your loan.
Resist the urge to use your credit cards or to sign up for new credit cards while you’re trying to buy a home. Pay your card balances per usual, and on time. Ask your lender what you can do to make sure your loan stays on track.
It’s better to picnic on the floor for a few days than lose the opportunity to buy the home of your dreams.