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FHA Loans, Credit Scores, and Your Repayment History

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One common type of question we’ve been asked as of late has to do with a borrower’s chances at getting an FHA loan approved in spite of bad credit, past financial difficulty, or a combination of both. There are many important things to understand about credit, but one of the most important for any borrower interested in an FHA should know about? The FHA’s attitude towards on-time bill payment, past financial difficulty, and related issues.

The FHA loan rulebook, HUD 4155.1 says in Chapter Four, Section C, “Past credit performance is the most useful guide to

• determining a borrower’s attitude toward credit obligations, and

• predicting a borrower’s future actions.”

That’s a basic general guideline, as is the next line from Chapter Four. “Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”

The FHA rules for lenders elaborates on this point, stating that the lender needs to examiner the applicant’s overall pattern established by his or her credit record and not isolated incidents. “When analyzing a borrower’s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred.”

That last line is the key–if a borrower comes to the FHA loan application with 12 months of reliable payments, there is a far better chance of getting an FHA loan approved. What does the FHA consider to be a reliable payment record? There are clues in Chapter Four:

“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.”

Furthermore, the FHA does not sound overly concerned with “Minor derogatory information occurring two or more years in the past”, saying these issues do not need explanations. However, “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.”

Borrowers should take all of this information into account when in the planning stages for an FHA home loan application. If you haven’t got at least one year of on-time payments on your record, you may wish to consider waiting to apply until you do–your chances will be greatly improved.

Do you have questions about FHA home loans? Ask us in the comments section.

Joe Wallace - Staff Writer

By Joe Wallace

September 27, 2013

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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FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

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