Is it possible to get an FHA loan application approved with late or missed payments on your credit report?
It’s easy to get caught up in a struggle with common financial problems, and some of the simplest situations (late and missed payments on financial obligations) can have the biggest impact on a borrower’s credit rating or perceptions of creditworthiness.
Having a handful “lates” and/or missed payments in your recent credit history might not affect your overall financial bottom line IF you’re not planning to seek new lines of credit. But if you are planning to apply for a home loan in the 12 months following late or missed payments, this situation becomes far more important.
FHA loan applications, like other major lines of credit, are affected by anything that changes the borrower’s patterns of reliable financial activity. Late and missed payments are a cause of concern for the lender.
The basic rule of thumb in the home loan industry? Coming to the mortgage loan process with anything less than 12 months of on-time payments on your credit history beforehand is a serious issue.
Late and missed payments in that 12 months prior to your application can make it much more difficult for a participating FHA lender to justify approving your loan.
The “12 month rule” in the FHA loan rule book, HUD 4000.1 basically instructs the lender that, depending on circumstances, the loan must be “downgraded to a refer” and “manually underwritten” where late or missed payments have occurred within the 12 months leading up to the loan application.
The spirit and letter of these FHA loan rules can be found in these instructions to FHA lenders who are processing FHA cash-out refinance loan applications:
“The Mortgage must be downgraded to a Refer and manually underwritten if any mortgage trade line, including mortgage line-of-credit payments, during the most recent 12 months reflects:
-three or more late payments of greater than 30 Days;
-one or more late payments of 60 Days plus one or more 30-Day late payments; or
-one payment greater than 90 Days late.”
Having your home loan or FHA refinance loan “downgraded to a refer” increases the risk of having the loan denied, depending on circumstances. If your FICO scores and other financial qualifications are otherwise outstanding, this may offset the danger to some degree. But if you have late or missed payments in your recent credit history, consider waiting to fill out your home loan application until your late/missed payment falls outside the most recent 12 months.