November 29, 2013
Can a borrower be turned down for an FHA loan because of a lack of credit history? Recently we fielded a reader question about FHA loans that included the following line:
“I do have older doctor bills that are outstanding but everything else I have saved and payed cash for, therefore making it unnecessary to have a credit card.” Would this lack of a credit card work against the FHA loan applicant?
Before answering, it’s important to point out that a borrower’s credit activity, regardless of the type of credit (utility bills, rent payments, student loans, etc) must reflect a general pattern of reliability. A borrower that cannot show at least one year of on-time payments to all creditors in the time leading up to the new loan application may have difficulties getting FHA loan approval.
Having said that, here is what the FHA loan rulebook, HUD 4155.1, says about a lack of credit history:
“The lack of a credit history, or the borrower’s decision to not use credit, may not be used as the basis for rejecting the loan application.” That’s simple enough, but the FHA elaborates in order to make this issue as clear as possible.
“Some prospective borrowers may not have an established credit history. For these borrowers, including those who do not use traditional credit, the lender must obtain a non-traditional merged credit report (NTMCR) from a credit reporting company, or develop a credit history from
• utility payment records
• rental payments
• automobile insurance payments, and
• other means of direct access from the credit provider, as described in HUD 4155.1 4.C.1.e.”
Again, all borrowers including those who have non-traditional credit histories or a lack of credit history in general should take care to come to the FHA loan application process with at least a year of on-time payments on their credit histories.
It’s the only way to apply for an FHA loan with confidence. The lender will definitely look at the payment history of all borrowers to be obligated on the loan, so it’s an important detail.
Do you have questions about FHA home loans? Ask us in the comments section.
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.
Browse by Date: