December 5, 2017
Do you ever wonder about applying for an FHA Loan while having charge-off accounts in your credit history? Is it possible to get approved for an FHA home loan even though you have some negative credit information in your background?
This is a question many ask, and the answer can be complicated depending on how old that negative credit data is, and whether or not it indicates an overall pattern of credit behavior.
When you fill out an FHA loan application, your loan officer will need to examine your credit history, FICO scores, and other areas to determine your credit worthiness. Some borrowers come to the loan process with outstanding credit, others may have old issues or even currently disputed items on their credit reports that make them worry about loan approval.
One area that is a common issue for those seeking major lines of credit? “Charge offs” or charge-off accounts. A borrower may have a charge-off on their credit history, but does this affect loan approval? It’s important to start answering this question with an examination of what the FHA loan handbook (HUD 4000.1) describes as a charge off account:
“Charge Off Account refers to a Borrowers loan or debt that has been written off by the creditor.” FHA loan rules require the lender to exercise due diligence and determine whether the charge off was the borrower’s fault, whether it was the result of a one-time circumstance unlikely to be repeated, or if it was caused by a general disregard for financial obligations.
In cases where such accounts exist, the lender is required to document the reasons “for approving a Mortgage when the Borrower has any Charge Off Accounts. The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding Charge Off Account. The explanation and supporting documentation must be consistent with other credit information in the file.”
Not all charge-off accounts are the same. Some are disputed, where the borrower challenges or contests the debt or the circumstances behind it. What do FHA loan rules say about a borrower who disputes the charge-off account?
A disputed charge-off account falls under a larger category called the disputed derogatory credit account, described in HUD 4000.1 as follows:
“Disputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.”
In these cases HUD 4000.1 requires the lender to analyze the documentation on the account(s) “for consistency with other credit information to determine if the derogatory credit account should be considered in the underwriting analysis.”
Some things can be excluded from the lender’s analysis:
“The following items may be excluded from consideration in the underwriting analysis:
–disputed medical accounts; and
–disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use provided the Mortgagee includes a copy of the police report or other documentation from the creditor to support the status of the account in the mortgage file.”
If any of these issues pertain to your loan application, have a discussion with the loan officer to see what may be required to approve your mortgage loan.
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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