November 27, 2013
When some borrowers apply for an FHA loan for the first time, they may worry that past minor credit mistakes could hurt their chances at loan approval. Do these minor credit problems affect a borrower’s chances at an FHA mortgage? Or can the lender ignore certain minor credit issues if the borrower’s overall pattern of repayment and credit management is good?
There is no simple answer to this question since the answer depends on the specifics of the borrower’s situation, but FHA loan rules in HUD 4155.1 do offer a few clues as to what you can expect in these cases.
Any delinquent account must be investigated by the lender, even if in the end it doesn’t affect the application. According to FHA loan rules, “The lender must document the analysis of delinquent accounts, including whether late payments were based on
• a disregard for financial obligations
• an inability to manage debt, or
• factors beyond the borrower’s control, such as delayed mail delivery, or disputes with creditors.”
That covers the lender’s requirements. But what is the lender to do with this information? What is expected once the situation leading to the minor credit problem is fully understood?
“Minor derogatory information occurring two or more years in the past does not require an explanation. Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file.”
In short, lenders don’t have to “sweat the small stuff” under the right circumstances. In situations where there are bigger credit issues, the lender may need to require the borrower to “provide an explanation for major indications of derogatory credit, such as judgments and collections, and any minor indications within the past two years” according to HUD 4155.1.
Do you have questions about FHA loans? Ask us in the comments section.
Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.
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