Suddenly, the phrase "cleared to close" doesn't mean so much.

Because of a new Fannie Mae policy, a mortgage lender's commitment to fund isn't final until it's final.  Lenders have reason to revoke a person's mortgage approval all the way up until the point of funding.

Scary, scary stuff.

Fannie Mae's "Loan Quality Initiative"

It's called the Loan Quality Initiative. In an attempt to minimize "bad loans", Fannie Mae has told lenders to take more responsibility for their files, and has put them on the hook if loans go bad.

The Loan Quality Initiative is Fannie Mae's response to surging foreclosures. The program shifts the onus of mortgage guideline compliance away from the government-backed group and to the individual banks responsible for making loans.

The LQI scope is broad, taking 9 pages in summary and, for the most part, mortgage applicants won't be bothered with the changes. It's just a lot of extra work for the bank -- things like Social Security Number validation checks and borrower occupancy standards.

There is, however, one major consumer hurdle. And it's a doozy.

Beware The 11th-Hour Credit Score Repull

In the new LQI environment, Fannie Mae has lenders that an applicant's credit profile did not change while the loan was in underwriting.  If the profile did change and the lender "misses" it, Fannie Mae can then refuse to purchase the loan for securitization, burdening the bank with loan on its books (and possibly a loss).

Therefore, it behooves banks to take each mortgage applicant's credit report in hand, and do a complete re-pull just prior to closing -- just to make sure nothing changed.

Banks wants Fannie Mae to buy their loans so they're looking at the re-pulled reports for evidence of any of the following events that might have occurred while the loan was in underwriting:

• Did the applicant apply for new credit cards?
• Did the applicant run up existing cards?
• Did the applicant finance an automobile, or other major purchase?

If the updated credit report doesn't match the original credit report, the mortgage is subject to a complete re-underwrite and a possible loan turndown.

The 3 Things An Underwriter Will Scrutinize

When banks re-pull credit just prior to closing, there are 3 things for which an underwriter is looking, and specific actions the bank will take.

What the bank will do: Recalculate debt-to-income ratios using your "new" minimum payment due figures. If the DTI exceeds Fannie Mae's maximum threshold, the loan will be denied.

What you should do about it: Don't run up credit cards prior to closing -- even for layaway items. Consider paying more than the minimum due, just in case.

What the bank will do: Use your new credit score to assess loan-level pricing adjustments or outright denials for when scores fall below Fannie Mae's minimum credit score requirement.

What you should do about it: Follow the basic rules of keeping your credit score high -- pay your bills, don't let things go into collection, and don't look for new credit unless necessary. myFICO.com has a terrific series on credit scoring you can review.

What the bank will do: Look at the Credit Inquiry section of your credit report to look for "non-disclosed liabilities". If items are found, the bank will ask for supporting documentation on the inquiry, and will use the information to re-underwrite your mortgage.

What you should do about it: Don't go looking for new credit until after your loan is funded.  Period.  Now re-read that first sentence, please, to help it sink it.

And remember -- this is all happening after your loan has reached "final approval" status.

Loan Approvals Are Tougher, But Not Impossible

Fannie Mae started its Loan Quality Initiative is to improve its loan pool's performance.  Better loan quality can help keep conforming mortgage rates down and reducing taxpayer burden from foreclosures simultaneously.  That's two big wins.

Unfortunately, the LQI will also lead to additional mortgage turndowns and a lot of busted closings.

Be extra careful with credit between your application date and your closing date, therefore.  If you must buy something big, think about paying cash.  Anything that goes on a card can be used as grounds for revoking an approval.

Even if your loan is cleared-to-close.

For help with your mortgage approval, or questions about the Loan Quality Initiative, . I am happy to walk you through it.

Credit scores matter.

Credit scores can mean the difference between a 4.25 percent and a 5.25 percent mortgage rate; a conforming mortgage and an FHA mortgage; an underwriting approval and an underwriting denial.

And most people know this. It doesn't stop them from keeping their credit scores under wraps, however. There seems to be a persistent belief among Americans that "having your credit pulled" is a bad thing.

In some instances, yes. In most instances, no. It's because not all credit applications are created equal.

At least, not in the eyes of the credit bureaus.

Having a mortgage company pull your credit is different from having Target do it.  To understand why, let's start with some credit scoring basics.

Credit Inquiries Are A Formal Process

A "credit inquiry" is a formal request to review a person's credit report.

Credit inquires are grouped with other traits into a credit-scoring category called "New Credit". New Credit represents a tiny 10 percent a person's complete credit score.  On the scale of 300-850, therefore, credit inquiries represent just a portion of complete category that accounts for a maximum of 85 FICO points.

Your credit score can't drop 100 points from a credit check.

Credit checks come in many flavors, but only 4 will change a person's credit score:

1. A credit check for a mortgage loan
2. A credit check for an auto loan
3. A credit check for a credit card application
4. A credit check for a store credit card, or consumer loan

These 4 types are singled out because, in each case, the initial credit inquiry is requested for the specific purpose of taking on more debt.  Extra debt increases the probability of credit default and credit scores drop as a result.

Even then, though, the risk of default varies by credit type.

A credit card application can be more damaging to a credit score than a mortgage application.  This is because credit card debts tend to revolve higher over time versus a mortgage which eventually pays down to $0.

All things equal, credit card applications harm your credit score much more than an application for a home loan.

A Credit Inquiry Lowers Your FICO By 5 Points

When compared to the other credit scoring elements, Credit Inquiries is a relative nothing.

In the official FICO scoring model, Payment History and Credit Utilization account for 65% of a score, combined, and the amount of time during which you've had credit to your name accounts for 15%.  These three areas are over-weighted because the bureaus are more concerned with what you've already done with your credit versus what you might do with more of it.

Your credit past is the best clue to your credit future.

It's one of two reasons why it's okay to give your social security number to as many lenders as you want. The impact of a credit inquiry is minuscule as compared to your history as a Model Credit Citizen.

A mortgage credit inquiry is estimated to lower a credit score by just 5 points.  Unfortunately, we'll never know for sure because the very act of examining the credit score causes it to move. In Physics, this is called the Heisenberg Principle.  On MTV, it's called The Jersey Shore Syndrome.

Put a camera on something, and it changes.

The Credit Bureaus Don't Hit Your FICO Twice

The second reason you should shop around with lenders is that -- unlike applying for multiple credit cards -- applying for multiple mortgages won't ding you for multiple, consumer-initiated inquiries.

Applying common sense: You might apply for 5 credit cards and use them all. You're won't be approved for 5 mortgages. As such, the credit bureaus have made it formal policy to permit "rate shopping".

Talk to as many lenders as you want in a 14-day time frame; have your credit checked as often as you'd like; compare rates and fees.  All of the inquiries will be lumped into a single application.

It's good for you and it's good for the bureaus. Your credit scores stay high and TransUnion, Equifax and Experian collect more fees from the banks.

Advice From The Credit Bureaus On Getting Low Rates

To promote rate shopping and to lessen The Fear of Credit Inquiry, the people behind the FICO brand spell out for you the best way to get the best mortgage rates possible:

1. If you want the best rate, you should "shop around" for it
2. Limit rate shopping to 14-day timespan to keep your credit scores high
3. Mortgage lenders need your FICO to give accurate rate quotes so give up your social security number

Metaphorically, not letting your lender see your FICO is like not letting your doctor check your blood pressure. You'll get a diagnosis when the appointment is over -- it just might not be the right one.

Start Your Mortgage Rate Shopping With A Free Rate Quote

Start your rate shopping now. and we'll start with your credit pull. From there, I'll get you a low mortgage rate to compare with other banks.

FHA mortgage rates are lower than conventional mortgage rates right now.

It's an interesting development, especially for homeowners and home buyers with low equity.

Unless you've got 20 percent into a property, if you're locking a 30-year fixed rate mortgage, there's compelling reasons to go FHA.

The first reason to choose FHA is an obvious one -- mortgage rates are lower. Right now, there's 1/8 percent difference between the comparable FHA and conventional 30-year fixed products and, over 30 years on a mortgage, that can really add up.

The second reason why FHA may be better than conventional right now is that FHA mortgage insurance premiums are lower versus the private insurance offered through Fannie or Freddie.

On a 10-percent-down home loan for applicants with A-plus credentials, FHA insurance ends up being cheaper by 0.34% per year.

Assuming a $200,000 mortgage, that's $680 per year and for people with FICOs under 740, the savings get substantially bigger. Find out your credit score for free from CreditReport.com if you don't know it already.

Despite these two reasons, however, when it comes to mortgages, we have to remember that it's not always about rate.  Costs matter, too.  FHA mortgages may be cheaper than conventional loans on an on-going basis, but they're rarely cheaper at the outset.

This is because FHA mortgage carry mandatory, up-front closing costs.  On streamline refis, the fee is 1.5 percent FHA fee; on purchase and regular refis, it's 1.75 percent; on "delinquent" mortgages, it's 3.0 percent.

Homeowners torn between FHA and conventional may find FHA "rate-attractive" but cost-prohibitive.  The math will vary from home-to-home, and homeowner-to-homeowner. Given the FHA's low rates, however, the program at least warrants some consideration.

To see how the math compares on your home, or pending home purchase, call or with the details of your situation. We'll see how the math works out best for you.