December 7, 2016
Credit issues-an important area to consider when planning for a new FHA mortgage. One reader asks, “I am in the process of settling with a credit card lender from an account that went bad several years ago. Basically I fell on hard times and stop paying it. I owe about 10k.”
“However I with my lawyer they have agreed to accept 3400. My understanding is this will reflect on my credit is that this will report on my credit report as settled for less than full balance. How will this affect my chances of buying a home with an FHA loan? Note this credit card is from about 6 years ago. I have many other credit cards probably 7 or 8 that I have applied for since this default and have always paid them on time along with my car and house on time.”
Judgments, charge-offs, and related financial issues that can show up on your credit report, and this is naturally a concern for a borrower getting ready to apply for a major line of credit in spite of previous credit issues.
The good part of this reader question is that the reader has already taken the advice of financial experts and FHA loan rules alike by establishing a solid record of payments on subsequent lines of credit. The disputed or delinquent account mentioned in the reader’s question may appear on the credit report, but if the creditor has entered into a satisfactory arrangement with the borrower, this goes a long way toward helping the borrower succeed with new credit applications.
Since part of the original debt was written off by the creditor, it may be viewed as a charge-off account by the lender. FHA loan rules in HUD 4000.1 state, “Charge Off Account refers to a Borrowers loan or debt that has been written off by the creditor…The Mortgagee must determine if Charge Off Accounts were a result of:
-the Borrowers disregard for financial obligations;
-the Borrowers inability to manage debt; or
-extenuating circumstances.”
According to this section of HUD 4000.1, the lender will be required to document “reasons for approving a Mortgage when the Borrower has any Charge Off Accounts. The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding Charge Off Account. The explanation and supporting documentation must be consistent with other credit information in the file.”
Individual lender standards apply in any case, so the borrower will need to work with the lender to see what may be possible at a given financial institution.
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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