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HUD
requires a borrower to demonstrate a good to excellent repayment history of all
debts. This history serves as the most useful guide in determining a borrower's
willingness to repay credit obligations and serves as a model in predicting
his/her future actions.
A
borrower who has made payments on previous or current credit obligations (such
as a credit card, student loan, etc.) in a timely manner represent a reduced
risk to HUD. Conversely, if the credit history, despite sufficient income to
support these debts, continuously reflects slow or often late payments,
judgments and delinquent credit accounts, strong offsetting factors will be
necessary to approve the loan.
When
analyzing a borrower's credit report, it is important to focus upon the general
pattern of credit behavior rather than isolated occurrences of late payments.
Often times, people will experience a period of financial difficulty in the past
and does not necessarily translate into an unacceptable risk. Reasonable
explanations of the credit derogatory and evidence of offsetting factors (such
as a new job or promotion with greater stability and pay, for example) will be
necessary. All derogatory credit information must be explained, in writing, by
the borrower.
The
following is a brief synopsis of the credit underwriting guidelines for FHA home
loans:
 Lack
of credit history:
If a borrower does not have a minimum of 2 trade lines on their credit report,
alternative forms of credit may be used. This would include items such as auto
insurance payment history, utility bills, etc.
Included
credit obligations:
Any installment loan (e.g. student loans, car loans, etc.) with less than
10 months remaining does not need to be included when qualifying for a FHA home
loan. However, consideration is given to a large debt of over $100 a month,
regardless of the number of months remaining. Furthermore, payments on auto
leases with less than 10 months must be included in the qualifying ratios. The
minimum payment on all revolving accounts (i.e. credit cards) is also factored
in. If the borrower has an open revolving account without a balance, $10 per
open account should be included when qualifying. Any loan where the borrower has
co-signed for another party is included with their debts unless the borrower can
prove that the the other party has made the payments on their own for a minimum
of 12 months.
Chapter
7 Bankruptcy:
FHA requires a minimum of 2 years since the discharge of the bankruptcy.
An explanation of the bankruptcy will be required. Furthermore, the borrower
should have re-established credit (i.e. secured credit card) with no late
payments.
Chapter
13 Bankruptcy:
FHA will consider a borrower still paying on a Chapter 13 bankruptcy if the
payments to the court have been made for a minimum of 1 year in a satisfactory
manner (as verified with the courts) and with the approval of the court trustee.
Federal
Debts: A
borrower is not eligible for a FHA loan if he/she is delinquent or in default on
any federal debt (such as a HUD or VA mortgage, student loans, SBA loans or a
tax lien against his/her property). Borrowers can become eligible by bringing
any delinquent accounts current, making satisfactory repayment arrangements with
the creditor (generally a 3 month history will be required), or paying the
account in full.
Judgments:
Judgments must be paid in full prior to closing.
Collection
Accounts: If
a collection account is minor in nature ($100 or less), it generally does not
have to be paid off as a condition of loan approval. This may vary from region
to region.
Foreclosure:
A borrower who has had a property foreclosed upon, or who has given a
deed-in-lieu of foreclosure within the previous 3 years, is generally not
eligible for a FHA home loan. However, if it was the result of extenuating
circumstances beyond the borrower's control (such as the death of a spouse, loss
of employment, or serious long-term illness, etc.) and the borrower has since
re-established good credit, an exception may be granted. However, extenuating
circumstances do not include the inability to sell a house when transferring
from one area to another.
Non-purchasing
Spouse: If a
married borrower is purchasing a property by himself/herself, the credit
obligations of the spouse must be included with the application and will be
factored in with the borrower's credit obligations and used to determine the
financial capacity of the borrower. Furthermore, the non-purchasing spouse may
be required to sign a security instrument or documentation relinquishing all
rights to the property.
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