February 7, 2014
A reader asks, “I have the income qualifications, the credit score qualification, and the down payment amount. However I also have outstanding amounts from old debt collection agencies. Do old debt collections really matter if I have everything else? Do the amounts of these old collections matter also?”
The answer to this reader question isn’t as simple as a yes or no reply–there are a number of factors that may apply. How large the old collections could be one of those factors, the nature of them, and how old they are may all factor into the equation. Lender standards would also play a part–some lenders may or may not be as forgiving as others depending.
All that said, let’s examine what FHA loan rules say about the matter in HUD 4155.1 Chapter Four, Section C. It includes the following instructions to the lender:
“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 would seem to answer the reader’s question in part, at least where FHA minimum standards are concerned. Chapter Four adds:
“The lender must document the analysis of delinquent accounts, including whether late payments were based on
• a disregard for financial obligations
• an inability to manage debt, or
• factors beyond the borrower’s control, such as delayed mail delivery, or disputes with creditors.”
Chapter Four advises the lender that, “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.”
Borrowers should know that each FHA loan application is processed individually, so extenuating circumstances that apply in these cases may be taken into account by the lender depending on what they are.
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 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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