FHA Loans and Negative Credit Report Information
What is the lender required to do when encountering any of these three things on your credit report?
Disputed Derogatory Credit Accounts
The FHA and HUD define these accounts as follows, as listed in HUD 4000.1:
“Disputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.”
What is the lender required to do when finding this information in a credit report? A big part of moving forward with the loan (in spite of the presence of this negative credit information) is obtaining a letter of explanation from the borrower.
But more documentation may be required. If the disputed derogatory credit occurred because of identity theft, credit card fraud or other crimes against the borrower, the lender must get a copy of a police report and/or other documentation to support the claim.
The lender is also required to determine that the disputed accounts were not the result of financial irresponsibility.
“Charge Off Account refers to a Borrower’s loan or debt that has been written off by the creditor.” This is how it is described in HUD 4000.1.
In these cases the lender must, as with disputed derogatory credit accounts, make sure the charge-off account situation was not the result of financial irresponsibility; the lender will require written documentation and/or an explanation of the situation that led to the charge-off(s) occurring.
HUD 4000.1 describes collection accounts as, “a Borrower’s loan or debt that has been submitted to a collection agency through a creditor.” As with the other areas above, the lender has to determine that the collections did not happen as a result of being unable to manage money or handle credit wisely.
The lender will ask for supporting documentation/written explanations as to the situation that led to the collections.
None of these situations is technically an automatic barrier to loan approval but it does make it more difficult for the loan officer to justify the home loan. FHA loan rules are designed to be flexible but lender standards will also apply-you will need to discuss your circumstances with a participating lender to see what rules may apply in your situation.
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