The Impact of Late Payments on FHA Loan Approval
June 20, 2023
Today's economic landscape is compounded by factors like inflation and rising utility expenses. These are additional hurdles tacked onto other post-pandemic problems that make securing a home loan an uphill battle for some. If you find yourself on the brink of missing payments on your rent or mortgage, the stakes become even higher, especially if you're eyeing an FHA home loan.
For those hoping to buy a home or refinance with an FHA mortgage, try to maintain a clean payment record for at least 12 months before starting the loan application process. Doing so with less than a year of timely payments on your credit history significantly complicates the approval process. Late or missed payments on housing expenses are a red flag, making it challenging for lenders to justify approving your loan.
The FHA Handbook, specifically HUD 4000.1, enforces the "12-month rule," stipulating that, depending on circumstances, the loan must be "downgraded to a refer" and "manually underwritten" if late or missed payments on a mortgage occurred within the 12 months leading up to the application. The FHA provides no leniency in this regard.
While there may be some consideration in cases where FICO scores and other financial qualifications remain strong, the risk of denial increases if the loan is downgraded to a refer status. However, some leniency may be granted if the late or missed payment is a one-time issue, provided it can be adequately documented.
Ultimately, the lender's discretion plays a significant role, and borrowers with any late or missed payments in the last 12 months might consider delaying their loan application until they've achieved a full year with no such issues. This cautious approach could prove to be the pivotal factor in securing loan approval.
------------------------------
RELATED VIDEOS:
Let's Talk About Home Equity
Understanding Your Loan Term
Your Home Loan is Called a Mortgage
FHA Loan Articles
April 30, 2025 In a previous post, we discussed why FHA borrowers should carefully consider whether paying for discount points truly serves their best interests, focusing on factors like short-term homeownership, opportunity cost, FHA mortgage insurance, and the prevailing interest rate environment. Discount points are an option for borrowers willing to pay a fee to lower the interest rate by a set amount. This is not right for all borrowers, and you don't want to pay for points you won't benefit from during the loan term.
April 29, 2025Are you considering buying a home with an FHA loan? You'll likely talk to your participating lender about FHA loan "discount points" – fees you pay upfront for a lower interest rate on your mortgage. The idea behind discount points is a straightforward exchange: you spend money today to reduce your interest rate. Typically, one point equals one percent of your total FHA loan. In return, your interest rate might decrease by an amount you and the lender agree upon.
April 28, 2025Home loans have various expenses that aren't apparent to a new borrower until much later in the process. What do you need to consider when making your home loan budget? It might not be complete without addressing some of the issues we cover here.
April 23, 2025 While the prospect of lower interest rates or more favorable loan terms can be enticing, there are situations where waiting is the better option. Refinancing without carefully considering your current financial circumstances is never a good idea, but careful planning in the current financial environment is even more important.
April 22, 2025First-time home buyers worry about loan approval, but there are important steps to take to increase the likelihood that the lender will approve their application for the loan or pre-approval. What do you need to know before you choose a lender?
