Are potential FHA borrowers eligible for an FHA home loan if they are participating in a credit counseling program? This is a question on the minds of some borrowers trying to fix credit issues and repair past mistakes or problems associated with their credit.
Borrowers should always work on their credit, counseling program or not, before applying for any major line of credit such as a mortgage or auto loan.
The FHA and HUD even offer referrals to local, HUD-approved housing counselors for borrowers looking for pre-purchase advice including credit tips. (You can call the FHA directly at their toll-free number, 1-800 CALL FHA for these referrals).
Some borrowers choose a formal credit counseling program in order to work on credit repair issues, and there is an understandable concern that participating in such a program might potentially affect a credit application.
The fear for some is that if a lender knows the borrower is in such a program that it might become a problem at loan approval time.
But FHA loan rules in HUD 4000.1, the FHA lender’s handbook, indicate that such programs should not in and of themselves be considered a liability.
There are two types of FHA loan processes. One is something known as “manual underwriting” where the lender has to do more work on the loan due to certain factors. The other is known as “automatic underwriting” and is less labor intensive and allows the lender to submit certain details of your loan application for more “automated” processing.
Borrowers with certain credit issues cannot have a loan automatically underwritten and the lender is required to “downgrade” to the manual underwriting mode to insure the loan is a good risk for the lender.
We explain all that so that the FHA loan rules for credit counseling programs makes sense to potential borrowers. According to HUD 4000.1, participation in a credit counseling program is not grounds for downgrading the loan to a manual underwriting process.
The lender can process such applications using automatic underwriting, assuming the borrower is otherwise qualified.
HUD 4000.1 specifically instructs the lender as follows:
“Participating in a consumer credit counseling program does not require a downgrade to a manual underwriting. No explanation or other documentation is needed.”
Remember, it’s best to start looking at credit issues long before you fill out FHA home loan paperwork-start reviewing credit reports and related items about 12 months ahead of your actual loan application for best results.