FHA will analyze a borrower's credit history to determine the approval status of a mortgage loan. They will look at a borrower's credit history, late payments, bankruptcy, collections, judgements, federal debts, and foreclosures.
HUD will analyze a borrower's credit history in determining the FHA loan for approval. A borrower who has made timely payments serves as a guide and demonstrates their willingness to repay future credit obligations. On the opposite side, a borrower who reflects continuous slow payments, judgments and delinquent accounts is not a good candidate for FHA loan approval. Below is a list of items concerning the borrower's credit.
When the underwriter analyzes the borrower's credit, it is the overall pattern of credit behavior that must be reviewed, rather than isolated cases of slow payments. A period of financial difficulty does not disqualify the borrower if a good payment pattern has been maintained since then.
No Credit History
In the event a borrower does not have any credit lines (2 needed) on their credit report, the FHA will allow substitute forms of credit such as utility payment records, rental payments, car insurance payments, etc.
Chapter 7 Bankruptcy
The FHA guidelines state that a minimum of two years must elapse since the discharge date of the borrower and / or spouse's Chapter 7 bankruptcy, not the filing date. A full explanation of the bankruptcy will be required. The borrower must also have re-established good credit, qualify financially and have good job stability.
Chapter 13 Bankruptcy
The FHA guidelines state that they will consider a borrower still paying on a Chapter 13 Bankruptcy if the payments to the court have been satisfactorily made and verified for a period of one year. In addition, the court trustee will need to give written approval to proceed. A full explanation of the bankruptcy will be required. The borrower must also have re-established good credit, qualify financially and have good job stability.
Collections, Judgements and Federal Debts
The HUD guidelines state that if a collection is minor in nature, it usually does not need to be paid off as a condition for loan approval. Judgments must be paid in full prior to closing. A borrower is not eligible for the loan if they are delinquent on any federal debt. This can include tax liens, student loans, etc. Payment arrangements that would bring the borrower up to date may be considered for loan approval.
A borrower whose previous residence or other real property was foreclosed on or given a deed-in-lieu of foreclosure within the previous three years is generally not eligible for an FHA insured mortgage. However, if the foreclosure of the borrower's main residence was the result of extenuating circumstances beyond the borrower's control, and they have since established good credit, an exception may be granted. This does not include the inability to sell a home when transferring from one area to another.
In the wake of the Gulf oil spill crisis, many mortgage companies are waiving late payment penalties and credit reporting for home owners affected. Did you know that some VA lenders are also offering help for vets affected by the crisis?
VA loans are designed to help eligible current and former military members get affordable housing. A VA loan often offers more lenient underwriting terms than many conventional loans, but qualified applicants do have restrictions on the uses of a VA home loan.
The first thing you learn as a new FHA mortgage borrower is that you can't apply for an FHA loan at just any bank. The FHA must approve lenders to offer FHA loans, FHA refinancing and homeowner bailout programs.