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Old Credit Problems And FHA Loans

May 5, 2017

Do old credit problems come back to haunt you later when you fill out an home loan application? That’s basically what one reader asked us in the comments section this week:

“If (a) charge-off was from a student loan account a decade ago that was delinquent, but paid in full from a tax-return offset six years ago, how is this viewed?”

The reader is referencing some information we mention in a previous blog post, FHA Loan Standards: Charge-Offs and Collections, which includes the following information on how FHA loan rules instruct the lender to handle charge-off information found on a borrower’s credit report. The post includes a definition of what the FHA calls a charge-off account.

“Charge Off Account refers to a Borrowers loan or debt that has been written off by the creditor.”

FHA loan rules state the lender is required to determine if Charge Off Accounts were a result of “the Borrowers disregard for financial obligations, the Borrowers inability to manage debt; or extenuating circumstances.”

Participating FHA lenders are also 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.”

What the reader wants to know is whether the old charge-off account might affect chances at FHA loan approval. Because the activity happened so long ago, and was finally satisfied in the end, it is entirely likely that lender standards would apply. Borrowers in these situations will need to ask the lender whether that might be an issue.

That said, it’s possible that the lender will review the rest of the applicant’s credit report looking for patterns of more reliable credit habits since the time the charge-off was satisfied. If the borrower’s credit history shows evidence of responsible credit, on-time payments, etc. the issue may be viewed (depending on the lender) as a one-time problem that has since been dealt with.

If an applicants subsequent credit history does NOT show improvement, it’s possible the lender may have a more difficult time approving the loan due to repeated credit problems.

That is not to say that is what the reader brings to the transaction, but simply to point out that old credit problems may not be as problematic as you might think provided there is sufficient evidence that in more recent years you are a better credit risk.

Joe Wallace - Staff Writer

By Joe Wallace

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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