FHA Loans and FICO Scores

November 5, 2013

There’s a certain type of common question about what it takes to qualify for an FHA home loan involving the ability to get loan approval with past credit problems.

The FHA has issued guidance in 2013 about something called the Back To Work program which gives participating FHA lenders a bit more leniency for borrowers who have credit problems in their past that is specifically related to the recession--but what do the FHA loan rules say in general about credit, bill repayment history, and the borrower?

HUD 4155.1, the FHA loan rulebook, says in Chapter Four, Section C, “Past credit performance is the most useful guide to

• determining a borrower’s attitude toward credit obligations, and
• predicting a borrower’s future actions.”

That’s a basic general guideline, obviously. The FHA continues in Chapter Four, “Borrowers who have made payments on previous and current obligations in a timely manner represent a reduced risk. Conversely, if a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, significant compensating factors will be necessary to approve the loan.”

Your loan officer will review the repayment patterns established by your credit reports--the review is not designed to single out isolated incidents. A one-time problem is not viewed the same as a pattern of disregard for repayments, etc.

“When analyzing a borrower’s credit history, the underwriter must examine the overall pattern of credit behavior, not just isolated occurrences of unsatisfactory or slow payments. A period of past financial difficulty does not necessarily make the risk unacceptable, if the borrower has maintained a good payment record for a considerable time period since the financial difficulty occurred.”

If the FHA loan applicant fills out an application for a home loan with 12 months of reliable payments on record at the time of that application, there is an increased chance of getting an FHA loan approved. What does the FHA consider to be a reliable payment record? From Chapter Four, consider the “clues” a lender is looking for according to FHA loan requirements:

“The lender must document the analysis of delinquent accounts, including whether late payments were based on

• a disregard for financial obligations
• an inability to manage debt, or
• factors beyond the borrower’s control, such as delayed mail delivery, or disputes with creditors.”

That would seem to rule out what the FHA terms, “Minor derogatory information occurring two or more years in the past”, saying these issues do not need explanations. However, “Major indications of derogatory credit, such as judgments, collections, and other recent credit problems, require sufficient written explanation from the borrower. The explanation must make sense, and be consistent with other credit information in the file.”

Keep all of these things when you’re planning for your FHA home loan and you’ll have a much better idea of what the loan officer is looking for.