May 19, 2011
When a borrower applies for an FHA home loan, they must fill out a loan application that includes details about past and current employment, debts and lines of credit, plus submit to a credit check. All of this is part of what the FHA calls a Mortgage Credit Analysis.
According to the FHA, the purpose of this analysis includes giving an FHA approved lender the ability to determine the applicant’s credit “performance”, their ability to repay an FHA mortgage if the loan is approved, and to check the record to see if the borrower has “sufficient funds to close” if the loan goes through.
This credit analysis has specific rules and regulations to make sure it is fair, secure, and not subject to fraud or the accusation of fraud. That is one reason why the FHA has such strict requirements when it comes to the handling of verification forms and credit reports. For example, FHA rules do not permit credit reports to pass through the hands of third parties.
The borrower, real estate agent or “any other interested third party” cannot provide the lender with credit reports or scores–they must come directly from the credit reporting agencies themselves.
One important part of the application process is where the lender verifies the borrower’s identity and financial position. Part of this process involves the lender investigating the “source of funds for the mortgage transaction, and intended use of the property.”
The borrower must certify that the home purchased with an FHA loan is intended as a primary residence in order to get a typical FHA insured mortgage. The FHA does insure loans on multi-unit properties, but there are additional requirements and other issues that apply.
The lender must evaluate the borrower’s income, the likelihood of that income continuing into the future, and compare the amount of money currently earned with the amount of financial obligations the FHA loan applicant currently has. The lender then has to add the mortgage amount to the calculation; can the borrower afford to pay the FHA mortgage and meet all his or her other expenses and financial commitments?
All of this is standard for an FHA loan application. It’s one reason why borrowers are encourage to begin preparing a budget, examining credit issues and paying off outstanding debt at least one year before applying for a home loan; there are many issues to sort through and budgetary considerations to think about.
The earlier a house hunter begins preparing, paying off debt, and investigating credit reports, the more prepared he or she will be when the lender begins the mortgage credit analysis.
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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