July 25, 2013
For some borrowers, the credit approval process is a mystery, especially when it comes to FHA home loans. Do you understand what the lender needs in order to approve a home loan application? Borrowers should understand that FHA loan approval is based on several factors including FICO scores, debt to income ratio, but also the repayment history shown on your credit report.
FHA rules and instructions to the lender on this area are found in HUD 4155.1 Chapter Four. In Section C, we get some insight into this process and how the lender is supposed to evaluate your repayment history as found in a credit report:
“Evaluating credit involves reviewing payment histories in the following order:
• first: previous housing expenses, including utilities,
• second: installment debts,
• third: revolving accounts.
Generally, a borrower is considered to have an acceptable credit history if he/she does not have late housing or installment debt payments, unless there is major derogatory credit on his/her revolving accounts.”
Having an acceptable credit history is just as important as having an acceptable employment history. That’s why many financial planners recommend borrowers start preparing for an FHA home loan at least a year in advance, making sure that there is a minimum of 12 months with acceptable payment behavior–no late payments of any kind. That includes rent or mortgage payments. Consider what Chapter Four says on this subject:
“The borrower’s housing obligation payment history holds significant importance when evaluating credit. The lender must determine the borrower’s housing obligation payment history through the
- credit report
- verification of rent received directly from the landlord (for landlords with no identity-of-interest with the borrower)
- verification of mortgage received directly from the mortgage servicer, or
- review of canceled checks that cover the most recent 12-month period.
Note: The lender must verify and document the previous 12 months’ housing history even if the borrower states he/she was living rent-free.”
As you can see, FHA loan rules put a great deal of emphasis on the timely payments aspect of your credit report. It’s an area not to be underestimated when it’s time to submit a credit application of any kind, but especially on a major investment like an FHA mortgage.
Do you have questions about FHA 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.
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