Undisclosed debt is a common problem in the mortgage industry. At the initial qualification process for a loan, lenders qualify buyers based on information that is supplied by credit reports and the individuals themselves; however, the loan then enters a quiet period, the time from qualification until loan closing. During that time, it is very common for borrowers to take on more debt, which could disqualify the individual from the mortgage loan.
Prevalence of undisclosed debt
Since 2008, more stringent guidelines have improved the underwriting process, ensuring that borrower standards for loans are higher than they have been in the past. Yet, it is a misconception to believe that these relatively high-quality borrowers won’t take on more debt during this time. According to studies conducted by Equifax, the following factors, although helpful, have not reduced the risk of non-disclosure:
- Improved and stringent credit qualifications for borrowers
- Conservative lending standards
- Creditworthy borrowers
- Experienced professionals involved in the process
The same study indicated that a staggering 14 percent of mortgage applicants opened new credit and debt during the quiet period.
Why are they doing it?
Contrary to some beliefs, consumers are not entering into these loans on the pretense of hiding debt or keeping information from mortgage lenders. Most consumers have no idea that opening new lines of credit during the quiet period is problematic. And, in their excitement of owning a home, many new buyers purchase home goods, establish lines of credit to purchase furniture or spend money on other goods or services. Large purchases that require almost immediate installment payments such as new cars, boats or other high-priced loans also pose as a main risk to mortgage lenders.
What solutions are there?
In many situations, the best option for the mortgage lender is to run a secondary credit report right before closing; however, this can cause complications and stall the entire purchasing process if troubling new information pops up. It’s often too late at this point to repair concerns about undisclosed debt.
To counter this problem, Equifax offers dynamic monitoring. This service allows lenders to proactively monitor buyers’ credit use during the quiet period. The lender receives daily alerts of credit use including occurrences of new debt. As a result, the lender can utilize this time to warn and educate the consumer without having to worry about the demands of regulators.