December 17, 2013
A reader asks, “My wife and I have already completed home inspection,down payment and now must apply for FHA. We have already been officially told we qualify by score and income. I would like to know when mortgage companies look back at credit history and notice at least 3 creditor with late payments on them but I have the backing that I was in combat and wounded and not able at the time to pay it on time. I am 100% Disabled with VA award letters, can the company allow this as an acceptable excuse for not paying on time?”
FHA loan rules on credit history are found in HUD 4155.1, Chapter Four Section C, which says:
“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.”
But this section is also supplemented by another section of the rules which instructs the lender not to use isolated credit incidents as the sole determining factor in denying or approving an FHA loan application. This is good news for any reader with a situation similar to the one mentioned in our reader question:
“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.” Additionally FHA loan rules state, “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.”
In cases like these the best thing to do is prepare a written statement explaining the financial difficulty to include with application paperwork–this can help the lender make a better, more informed determination. As with all FHA home loans, each application is handled on a case-by-case basis in situations like theses–there is no one-size-fits-all answer.
In general terms, it’s best to come to the FHA loan process with 12 months of on-time payments on your credit record. That 12 months of reliable payment activity can go a long way toward loan approval in cases like these–doing so means the borrower has established he or she has recovered from the financial difficulty explained in documentation as mentioned above.
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 www.FHA.com, a private company and not a government website.
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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