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FHA Loans and Borrower Credit

March 19, 2014

098Some borrowers get nervous when applying for an FHA mortgage loan because of the credit check. There can be many reasons for this–some come to the house buying process with some history of credit problems, others may have disputes with creditors or other problems.

Having credit issues in the past is not necessarily a barrier to an FHA loan in the present. But there are FHA guidelines for the lender you should be aware of that can help you better prepare for an FHA loan.

The rules for FHA home loans found in HUD 4155.1 include instructions to the lender for analyzing borrower credit. Chapter Four of HUD 4155.1 has a section titled, “Past Credit Performance” and includes the following:

“Past credit performance is the most useful guide to

• determining a borrower’s attitude toward credit obligations, and

• predicting a borrower’s future actions.

Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”

The lender is required to examine your credit history and where past issues are concerned, also responsible for determining that the issues are truly “in the past”. From Chapter Four:

“When analyzing a borrower’s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred.”

That’s good news for many borrowers concerned that credit mistakes made as a college student or earlier in life won’t come back to haunt them–especially when they’ve worked hard to establish better credit since the time of the previous difficulties.

Chapter Four adds, “Minor derogatory information occurring two or more years in the past does not require an explanation. Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file.” As you can see, there are definitely options for those who have moved on since their past credit troubles.

Do you have questions about FHA home loans? Ask us in the comments section. You can apply or get pre-approved for an FHA loan at FHA.com, a private company and not a government website.

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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