FHA Credit Guidelines

Posted on January 2, 2009
Filed Under FHA Home Loans, Home Loans | Leave a Comment

FHA Credit Guidelines which borrowers and lenders must follow in order to obtain FHA financing for purchase and refinance loans.

Purchase Loans, Cash Out Refinance Loans, Rate Term Refinance Loans

A credit blemish here and there are not always a flat out reason for credit denial. There are many factors that come into play in underwriting credit and the best policy is to work with your lender who understands the credit qualifying criteria. He / She will be able to advise you about corrective actions that can be taken to improve your credit if the underwrite determines that at the present time you do not qualify for fha insured financing due to credit.

Many factors are taken into consideration such as: type of blemish, how old is the derogatory credit, what caused the late payment or collection & alternative credit sources. Many borrowers think they have bad credit when in fact they may have credit that is acceptable to the fha lender.

The underwriter will pay special attention to the following while determining creditworthiness:

Previous Mortgage or Rental Payment History: Provide the most recent 12 month rental or mortgage history. Verification of Mortgage, Verification of Rent from landlord or Canceled checks front and bank side. The lender might accept bank statements showing the amount of rent or mortgage being automatically deducted each and every month for the exact amount shown on the payment coupon from lender or rental agreement.

Recent or Undisclosed Debts:

The lender will look at any recent debt to find out if is being used toward the cash required for the down payment. Also, any inquiries in the last 90 days will be examined. An explanation will be required for any significant debt that shows on the credit report but is stated on the loan application.

Collections and Judgments:

To qualify for an FHA insured loan judgments do not have to be paid off if you have an agreement with the creditor for monthly payments and can provide documentation showing the payments have been made? The same is true with collections.

Past Foreclosures:

A borrower who has foreclosed or given a deed in lieu of foreclosure during the last 3 years generally will not qualify for an FHA insured loan. However, the lender will consider exceptions due to extenuating circumstances which will require a letter of explanation and complete documentation as well as re-established credit since the foreclosure or deed in lieu. Not being able to sell the home due to a job transfer or relocation do not qualify as reasons.

Bankruptcy:

Can I purchase a home if I’ve had a bankruptcy or am currently in Chapter 13?
Chapter 7: 2 years must have elapsed, re-established credit and or chosen to not incur new debt and document financial responsibility If 12 months has elapsed but less than 2 years and it can be documented that the bankruptcy was due to extenuating circumstances. Lender must document that needs to document that the events that led to the bankruptcy are not likely to occur again based on the borrowers current situation.

Chapter 13:

At least 12 months must have elapsed since the chapter 13 bankruptcy payout period began and the borrower has made each payment on time. The borrower also must receive permission from the court to enter into a home loan transaction.

Consumer Credit Counseling Payment Plans:

This is treated much like a Chapter 13 Bankruptcy. 12 months of the payout period must expire and all payments to have been made on time. Permission from the counseling agency to enter into a home loan mortgage transaction must be received in writing.

Streamline Refinance Loans

To obtain an FHA Streamline Refinance (with or without an appraisal) credit qualifying is not required by HUD. However, the lender may add restrictions. The current mortgage should not be delinquent. The borrower needs to be current on any federal debt and not be late, delinquent or in default.

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