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WASHINGTON – July 20, 2010 – Fannie Mae announced last week that it is reviewing the rule it put in place earlier this year requiring lenders to do a second credit check shortly before closing.

The goal of the rule is to identify new debt that might undermine an applicant’s ability to pay, but for both homebuyers and lenders, the second check is problematic. The search can uncover a short-term debt – medical bills that insurance is likely to pay – that would nevertheless derail a purchase.

“We keep telling people: ‘Don’t open new accounts. Don’t close existing accounts. Don’t do anything whatsoever that will alter your credit situation,’” says Eric Gates, a mortgage broker for Apex Home Loans. “But there will be people who can’t avoid increasing their credit card balances, or already have, and that’s where the problems will crop up.”

Lenders are particularly concerned about the rule because Fannie can require them to buy back loans in default up to two years after closing if there is evidence that the borrower had more debt than was disclosed at the time of closing.

Source: Washington Post, Dina ElBoghdady (07/16/2010