What do potential home loan borrowers need to know about FHA loans and credit reports? There are some very simple things that some don’t realize going into the home loan process that can definitely affect your participating FHA lender’s ability to approve your mortgage.
FHA Loan Credit Checks
The lender is required by FHA home loan rules to pull a loan applicant’s credit reports to review credit scores, credit history, and look for overall patterns of reliable use of credit.
However, some borrowers mistakenly assume that the lender will look at a credit report once, make the notes, and never go back to the credit report again.
This is not necessarily the case. Your FHA lender is charged with making sure that a borrower’s credit position is stable and that the basic credit qualifications remain valid for the duration of the loan approval process.
Why is this necessary?
FHA Loans And The Borrower’s Debt-To-Income Ratio
FHA loan credit checks include a review of the borrower’s active credit accounts for the purpose of verifying an FHA borrower’s debt-to-income ratio. Since new credit use may potentially increase that ratio, the lender can’t just review your debts and credit report once and then proceed to loan closing.
There are multiple reasons for this, not just the debt ratio issue, and HUD 4000.1, the FHA loan handbook, instructs your loan officer accordingly:
“The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios.”
Furthermore, “The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrower’s required funds to close on the Property being purchased.”
As you can see from the quote above, any new debt incurred during the FHA loan process must, among other things, be reviewed to determine that it was not the source of a borrower’s required down payment, or if it was used as a down payment source that it meets FHA requirements.
Applying for new credit, or major uses of existing credit during any mortgage loan application process could be an issue for final loan approval depending on circumstances.
Borrowers must be very careful in this area and it may be best to discuss such issues with your loan officer ahead of time to see what may be allowed and what could be a potential liability before closing time.