February 18, 2014
A reader asks, “I meet the income and credit score qualifications for an FHA loan, however I have two collection accounts on my credit report. These accounts were paid in full eight months ago. In addition, I had two credit card accounts 30 days late approximately a year ago. These were remedied within a reasonable time, yet they show on my credit report. I would like to add that these delinquent payments were due to a medical illness that left me disabled.”
“I recently applied with a lender for an FHA loan and was told that I did not qualify because of my payment history. I read that, ‘a collection is minor in nature and usually does not need to be paid-off as a condition for loan approval’. If these resolved collection accounts are minor why was I disqualified?” Also I read, ‘during an underwriter analysis of borrower credit. the overall pattern of credit behavior is being reviewed rather than isolated cases of slow payments’…Again, I must ask, why was my loan application denied?”
FHA loans have minimum standards for employment, income, and credit history. But these standards are only the minimums and lender requirements also factor in. The lender ultimately determines whether or not to approve credit to the applicant–we can’t say whether the information given in this reader question is within another lender’s standards or not.
That said, it is always best for any FHA loan applicant to put a minimum of 12 months between any negative credit information and the FHA home loan application. This can be a big help to the borrower–a full year of on-time payments on your record shows the lender an overall pattern that is favorable to the borrower.
In this particular case only eight months went by after the reader’s collection accounts were paid (as described above). By waiting a full 12 months before applying for an FHA loan, the borrower has more favorable conditions in the eyes of a lender.
Borrowers who have credit issues such as those described in the reader question here (related to medical issues or other things that may be deemed beyond the applicant’s control) should discuss these circumstances with the lender at application time to see what other considerations, documentation or paperwork might be needed to improve chances at FHA home loan approval.
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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