July 13, 2023
What is the connection between FHA loan approval and late or missed housing payments? The simplest formula given to most borrowers is that you should come to the home loan application process with nothing but on-time payments on all financial obligations for the last 12 months leading up to the day you apply.
Not all borrowers take that advice, and many want to know what the consequences of having a late or missed payment might be; in some cases the issue may be more problematic than others.
This is true of having late or missed housing payments on your record.
The lender will review your record of housing payments as one of the indications that a borrower is a satisfactory credit risk.
But what do the FHA loan rules tell the lender in situations when there are late/missed housing payments? How does this affect the loan process?
One thing that can happen is that the borrower’s loan is no longer able to be processed “automatically” but rather manually and possibly with added attention to the borrower’s credit habits, FICO scores, debt ratios, etc. Manual underwriting is not by itself the road to having your loan denied, but it may result in more stringent requirements depending on circumstances.
FHA Loan Rules For Late/Missed Housing Payments and Forward Loan Applications
If you are applying for an FHA mortgage to purchase a home, that is known in the industry as a “forward mortgage”. FHA loan rules in HUD 4000.1 instruct the lender:
“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.”
This section adds, “A Mortgage that has been modified must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments.”
FHA Loan Rules For Late/Missed Housing Payments and FHA No Cash-Out Refinance Loans
The rules for FHA no cash-out refinance loans are identical to the ones above for FHA forward mortgages.
FHA Loan Rules For Late/Missed Housing Payments and FHA Cash-Out Refinance Loans
FHA loan rules in HUD 4000.1 have the following instructions to the lender in cases where a cash-out refinance loan application includes a record of late/missed housing payments:
“The Mortgage must be downgraded to a Refer and manually underwritten if any mortgage trade line, including mortgage line-of-credit payments, reflects:
-a current delinquency; or
-any delinquency within 12 months of the case number assignment date.
A Mortgage that has been modified must utilize the payment history in accordance with the modification agreement for the time period of modification in determining late housing payments.”
Note that in this case, late/missed payments on a mortgage line of credit also requires the lender to downgrade to a manual underwriting situation.
For borrowers applying for loans post-COVID, it’s a good idea to talk to a loan officer about issues such as these that are related to the pandemic; there may be guidelines that address such circumstances above and beyond the FHA loan rules in HUD 4000.1. The same is true for victims of natural disasters in federally-declared disaster areas.
Don’t assume your circumstances in such cases will make you ineligible for an FHA mortgage. Let the lender decide.