June 5, 2014
In response to one of our earlier posts, FHA Loan Credit Report Rules, a reader asks, “So if you have bad credit you can’t get approved by FHA? I thought the whole point of FHA was to help people with credit issues buy a home….”
The key to understanding the FHA loan program’s requirements in this area is to know what the FHA loan rulebooks says about credit in general, and creditworthiness of the FHA loan applicant. According to HUD 4155.1, Chapter One, Section A, the lender or underwriter is responsible for making sure the loan applicant is able to repay the loan and willing to do so based on credit scores, credit history and related factors:
“The purpose of underwriting is to
• determine a borrower’s ability and willingness to repay a mortgage debt to limit the probability of default and collection actions, and
• examine the property offered as security to determine if it is sufficient collateral.”
Furthermore, the FHA loan rulebook discusses something called “the Four C’s of Credit” to help the lender make such a determination.
“The underwriter evaluates the four C’s of credit to determine a borrower’s creditworthiness. The four C’s of credit consist of a borrower’s
• credit history
• capacity to repay
• cash assets available to close the mortgage, and
• collateral.”
What information is required to help the lender make this determination? According to HUD 4155.1 Chapter One Section C, “A credit report submitted with a loan application must contain all credit information available in the accessed repositories. Additionally, for each borrower responsible for the debt, the report must contain all of the information available in the credit repositories pertaining to
• credit
• residence history, and
• public records information.”
The goal of underwriting, the process of approving or disapproving an FHA loan, is to prevent risky loans and/or loans that fall into default and foreclosure. That’s the general reason for FHA loan policy regarding FICO scores and other credit qualifications.
Do you have questions about FHA home loans? Ask us in the comments section. You can get information about applying or getting 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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