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Article Update: FHA Loan Rules On Late And Missed Payments

September 7, 2022

FHA Home Loan

Back in 2017, we published an article asking an important question. Is it possible to get an FHA loan application approved with late or missed payments on your credit report?

Borrowers can get bogged down with financial difficulty in the best of times. In an economic environment that includes rising gas and utility costs, inflation, and employment woes this threat is greatly elevated. Back in 2017, we didn’t have the pandemic to worry about, but in more recent times this factor has severely complicated many people’s finances.

If you get caught up in a struggle with common financial problems you may find some of the simplest situations–we are talking about late and missed payments on your recurring financial obligations–can have the biggest impact on a borrower’s credit rating or perceptions of creditworthiness.

As we noted in 2017, late and missed payments showing up 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 what about when you want to apply for a major line of credit like an FHA home loan or refinance loan? 

If you want to apply for a home loan in the 12 months following a late or missed payment, this situation becomes far more important. 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 the 12 months prior to your application can make it much more difficult for a participating FHA lender to justify approving your loan. And when it comes to housing payments this is even more critical.

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 on a mortgage 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 any of the following:

  • 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.”

As we noted in 2017, a 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.

Do you have late or missed payments of any kind in your credit history in the last 12 months? The basics of what we published back in 2017 still apply–it may be smart to wait until you have a full 12 months of on-time, every-time payments in your credit report.

Joe Wallace - Staff Writer

By Joe Wallace

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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