Credit Report Review
FHA guidelines require a review the credit history for the last seven years to determine whether there are any major indications of derogatory credit, such as undischarged debts, judgments, bankruptcy, and so on. Any litigation involving the borrower, including bankruptcy, foreclosure, deed-in-lieu, pre-foreclosure, short sale, judgments, tax liens, collection accounts, and charge-offs must be evaluated separately and meet the specific loan program guidelines.
FHA underwriters will pay attention to the hierarchy of credit. What that means is that the most emphasis is placed on the review of
- previous housing expenses,
- followed by payments on installment debts (ex. auto loans and student loans),
- and then revolving debts (credit cards).
FHA Credit Guidelines
Here are some general guidelines regarding different types of derogatory credit. Keep in mind that there are exceptions to these guidelines. If you have questions or comments, please contact us.
Mortgage Late Payments: Typically FHA lenders requires that there are no mortgage late payments in the most recent 12 months and they consider that any 30-day late payment in the last 12-month period should be treated as major derogatory credit.
Recently Obtained Debts: Recently obtained debt must be explained to confirm that is has not been incurred to help with the borrower’s cash investment (down payment and closing costs) requirements. Also, credit inquiries in the past 90 days should be explained.
Collections: FHA guidelines do not officially require that collection accounts are paid off in order to qualify for FHA loan approval. However, individual lenders may require that all collection accounts are paid or that different types of collections accounts are paid (ex. medical related collections can remain unpaid but all others must be paid). Collection accounts must be explained by the borrower in writing.
Judgments: FHA guidelines do require that judgments are paid off before the borrower can qualify for FHA loan approval. The only exception to that rule is if the borrower has agreed with the creditor to make regular and timely payments on the judgment and documentation is provided that the payments have been made in accordance with the agreement. Typically a minimum of six payments is required in order to obtain the exception.
Chapter 7 Bankruptcy: FHA guidelines require that the minimum waiting time is typically no less than two years from the discharge date. In addition, the borrower must have reestablished good credit or chosen to not incur new credit obligations.
If the borrower can show that the bankruptcy was caused by extenuating circumstances beyond the borrower’s control and that he or she has since demonstrated a documented ability to manage his or her financial affairs, the waiting period can be reduced to one year.
Chapter 13 Bankruptcy: FHA guidelines state that a Chapter 13 does not disqualify a borrower from obtaining FHA financing as long as the borrower can show that at least one year of the pay-out period has elapsed under the plan and that all of the required payments (and mortgage payments when applicable) have been made on time. Also, the borrower must receive permission from the court to enter into the mortgage transaction.
Foreclosure: FHA guidelines state that the minimum waiting period is three years for a borrower whose house has been foreclosed or who has given a deed-in-lieu of foreclosure. If the foreclosure was the result of a documented extenuating circumstances that were beyond the control of the borrower and the borrower has reestablished good credit since the foreclosure the three year waiting period may be waived. Extenuating circumstances include serious illness or death of a wage earner.
Consumer Credit Counseling Payment Plans: An FHA loan can be obtained by someone who has participated in a consumer credit counseling payment program as long as at least one year of the pay-out period has elapsed under the plan and all of the required payments have been made on time. In addition, the borrower must receive written permission from the counseling agency to enter into the mortgage transaction.
Delinquent Federal Debts: FHA states that if a borrower is presently delinquent on any Federal debt or has a lien, including taxes, placed against his or her property for a debt owed to the U.S., the borrower is not eligible for an FHA mortgage until the delinquent account is brought current, paid, otherwise satisfied, or a satisfactory repayment plan is made between the borrower and the Federal agency owed and is verified in writing. In this last situation, a history of six consecutive on-time payments must be verified. Existing tax liens on a borrower’s property can remain unpaid but they must take a subordinate lien position to the FHA loan. In addition, the payments to be made must be included in the borrower’s debt to income ratios.