February 26, 2018
What do you need to know about FHA loans, credit reports, and loan approval? To begin, your credit reports have a big part to play in the lender’s decision to approve your mortgage application. What do you need to know about this approval process and what the lender is looking for?
Home Loans Require More Than Good Credit Scores
FHA loans, like any other major line of credit, require the lender to determine that the applicant is a good risk for the loan. Your FICO scores may be well within the range the lender needs to approve your loan with maximum financing (that score may vary depending on the lender) but what ELSE does your credit report say?
For example, are you carrying the maximum or close to the maximum credit limit on your credit cards and other lines of credit? Carrying the max on several cards may affect how your lender reviews the other data in your credit history.
This is not in and of itself a deal-breaker for FHA loan approval, but other factors can make such issues more important. If your debt-to-income ratio is higher than the lender is comfortable with, the additional factor of carrying a high balance on your cards becomes more important.
You might get the impression from all this that FHA home loan approval is dependent on more than a simple look at your credit scores, debt ratio, and employment history, and that is absolutely correct.
Your patterns of credit activity including payments, but also how many lines of credit you have, how high the balances are, and how much potential debt you could get into after the loan closes may also be important considerations.
FHA Home Loan Approval Requires The Lender To Verify Your Credit, Income, And Employment
The lender won’t just look at your application data and make a note of your employment history, credit patterns, and other factors reviewed for loan approval. Your loan officer must contact your employer to verify your job history and income, and the lender is also required to exercise due diligence in cases where items on your credit report may seem inconsistent with other information supplied by the borrower.
How does that work? FHA loan rules in HUD 4000.1 tell the lender, “When an inaccuracy in the amount or type of debt or obligation is revealed during the application process and the correct information was not considered by the AUS, the Mortgagee must:
-verify the actual monthly payment amount;
-re-submit the Mortgage for evaluation by TOTAL if the cumulative change in the amount of the liabilities that must be included in the Borrower’s debt increases by more than $100 per month; and
-determine that the additional debt was not/will not be used for the Borrower’s Minimum Required Investment (MRI).
These rules are one reason why it is important to give yourself plenty of preparation and planning time before committing to a new home loan or FHA refinance loan; you’ll need plenty of time to review and understand the information in your credit reports and make sure you submit the most accurate data to the lender via your FHA home loan or FHA refinance loan application.
Bruce Reichstein has spent over three decades as an experienced FHA and VA home loan mortgage banker and underwriter where he was responsible for funding “Billions” in government backed mortgage loans. He is the Managing Editor for FHANewsblog.com where he educates homeowners on the specific guidelines for obtaining FHA guaranteed home loans.
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