It’s easy to forget that FICO scores are not the only credit issue lenders will examine when reviewing your FHA mortgage loan application. A lender isn’t just concerned with your scores; your ability to repay the loan and make your monthly mortgage payment requires a review of a potential borrower’s income and debt.
The lender has different standards depending on the type of debt. For example, changes to FHA loan rules published last year require the lender to take student loan debt into account–even if the loan isn’t payable yet. Such debts are known as “deferred obligations” and if no monthly payment is available, the lender must take a percentage of the total debt to make the monthly payment estimation.
FHA loan rules in HUD 4000.1 also include standards for reviewing a borrower’s installment loan debt and revolving charge accounts. According to the rules, installment debt has a strict definition:
“Installment Loans refer to loans, not secured by real estate, that require the periodic payment of Principal & Interest. A loan secured by an interest in a timeshare must be considered an Installment Loan.”
How is the lender directed to review such accounts?
“The Mortgagee must include the monthly payment shown on the credit report, loan agreement or payment statement to calculate the Borrowers debts. If the credit report does not include a monthly payment for the loan, the Mortgagee must use the amount of the monthly payment shown in the loan agreement or payment statement and enter it into TOTAL Mortgage Scorecard.”
When it comes to revolving charge accounts, FHA loan rules define such accounts as, “A Revolving Charge Account refers to a credit arrangement that requires the Borrower to make periodic payments but does not require full repayment by a specified point of time.”
HUD 4000.1 states the lender must, “The Mortgagee must use the credit report to document the terms, balance and payment amount on the account, if available. Where the credit report does not reflect the necessary information on the charge account, the Mortgagee must obtain a copy of the most recent charge account statement or use 5 percent of the outstanding balance to document the monthly payment.”
These accounts are not the same as a 30-day account, which is described as “a credit arrangement that requires the Borrower to pay off the outstanding balance on the account every month”. For these accounts, the lender must “verify the Borrower paid the outstanding balance in full on every 30-Day Account each month for the past 12 months. 30-Day Accounts that are paid monthly are not included in the Borrowers DTI. If the credit report reflects any late payments in the last 12 months, the Mortgagee must utilize 5 percent of the outstanding balance as the Borrowers monthly debt to be included in the DTI.”
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