Lenders balk when mortgage applicants even inquire about the possibility of taking on additional debt

You can call it Big Brother. You can call it high tech espionage. But be aware that if you apply for a mortgage in the coming weeks, you can be sure that your credit will be checked and rechecked – possibly monitored daily – to make sure that no signs of new debt appear before you go. take out the loan.

Just as the federal monitoring of telephone traffic that has grabbed the headlines of late was a direct result of the September 11, 2001 attacks, pre-close credit monitoring is a by-product of the real estate crash. Lenders are terrified of being forced to “buy back” loans from investors Fannie Mae or Freddie Mac because the borrowers had more debt than they disclosed at the time of application.

As a result, virtually all banks and mortgage companies use some form of commercially available program to keep tabs on credit records between the date of your loan application and your payment. One of the three national credit bureaus, Equifax, offers a popular service that monitors applicants around the clock and can detect even subtle clues that a home buyer is considering adding new debt before closing.

Suppose your mortgage application has just been approved. In the documents, you’ve laid out all of your credit obligations and just passed the crucial lender debt-to-income ratio test. You feel upbeat about moving to a new home, and you start to think about the things you need to buy: furniture for the living room and family rooms. New beds. televisions. Audio equipment.

So you visit a few stores and accept their low interest line of credit offers. You ask what could be up to $ 14,000 in new debt, all to be paid off monthly.

Ping! In the computer maze of Equifax, your merchant credit inquiries trigger alerts. Your lender or mortgage broker will be notified immediately that you are applying for additional credit. And in that case, that $ 14,000 in potential new payment obligations could drop your debt-to-income ratio.

Lenders say customers can mess up transactions in all kinds of ways. Annie Austin, senior loan officer at Cobalt Mortgage in Bellevue, Wash., Says a borrower went out and bought a new Porsche on credit after getting her loan application approved, despite warnings not to take on new debt until. fence.

Paul Skeens, president of the Colonial Mortgage Group at Waldorf, says that although he hands out a cautious “don’t do this” list to every applicant, some borrowers ignore him or forget that they have credit-related situations they never disclosed, like co-signed student loans, overdraft coverage requests on checking accounts, or even that the cash down payment they claimed was theirs was actually loaned to them by someone else and must be reimbursed. One borrower, Skeens recalls, had received money to purchase a house from a “loan club” that would require $ 600 a month to repay. Whoops!

According to Equifax vice president Raymond White, undisclosed debts – or new additional credit applications never disclosed to the lender – now end up in nearly one in five mortgage applications. Yet according to the rules of Fannie Mae and Freddie Mac, any increase in the debt-to-total income ratio of more than three percentage points or any change that pushes the ratio beyond 45% can put the lender in a vulnerable position. If the mortgage goes bad later, Fannie and Freddie can force the lender to buy it out – and that’s financial torture for any bank.

White says that failure to disclose debts on mortgage loan applications is an equal opportunity issue seen in all market segments, including affluent borrowers with excellent credit. Equifax research has found that people with high credit scores are much more likely to have undisclosed debt – or new credit obligations outstanding before settlement – than other categories of applicants.

“The higher your FICO score,” White said in an interview, “the more likely you are to buy something” that triggers an alert (or to apply for new credit).

It’s counterintuitive, he agrees, and it’s likely because consumers with higher FICOs feel more confident about their credit and may have more resources to handle new debt. But pings from car or boat dealers can still spoil home purchases or refinancings.

Bottom line: from application to closing, don’t shop around for new credit. It is quite possible that someone is watching. And suddenly you are a person of interest.

Ken harneyThe email address for is [email protected].