Written By: Joan Ewing, Op-Ed Writer
Hello Everybody – Cannot believe 2009 is going by so fast. As I stated last week – not much is really going on with changing guidelines, etc. with FHA, which is why I am going back to basics for a few weeks. Sometimes it is the basic that can be the most confusing.
So this week- we are going to cover Credit History. To start – let’s say - Past credit performance serves as the best guide for future credit performance. That is why the credit history of a borrower is so important. And as I always say – every borrower has a story, and just when I think I have heard them all – there is a new circumstance surrounding late payments, bankruptcies and late rent payments.
There are many different borrowers that run the gambit of, borrowers feel because they have declared bankruptcy, they will never be able to own a home; then some borrowers will call when they leave bankruptcy court and want to apply for a mortgage.
Let’s go over several areas of credit history that will need to be analyzed prior to getting loan approval:
Rent or Mortgage Payment History – This is probably the area that holds the most significant importance. The payment history must be verified through the credit report or independently receiving a verification from a management company. If the rent is paid to an individual, the borrower must product cancelled checks; no other form of verification is acceptable.
Recent Debts or Undisclosed Debts on Application. When the Loan Officer completes an application for a borrower, it is important that all debts be disclosed, this is the only way the loan officer can really qualify the borrower. If after the application, the credit report is run and there is additional debt, chances are, the borrower will not qualify for the mortgage. Once a credit report has been ordered, it is equally important to review the debts listed on the original application with those with balances on the credit report.
Review all inquires. Have any new accounts been open? Ask the borrower to address each inquiry separately and given an explanation of why the inquiry exists. Chances are, if the borrower has been shopping for a mortgage, they will be explainable. Pay close attention to any inquiries from retail companies and automobile dealers. Has the borrower bought a new car or a big retail purchase (computer, TV) that has not yet appeared on credit report? An explanation is necessary for all inquiries.
Collections and Judgments – All court ordered judgments must be paid off before the loan is eligible for FHA insurance. If the borrower has made arrangements to pay off a judgment and has been making payments for at least 12 months and can provide cancelled checks to support the payments, the judgment may not need to be paid off. An acceptable letter of explanation for the judgments must be provided by the borrower. A letter of explanation is needed for the collections; however, they do not need to be paid off.
Previous Mortgage Foreclosure. If a borrower has had a previous foreclosure for a primary residence or other property foreclosed within the previous three (3) years, a deed in lieu of foreclosed – the borrower will generally not be eligible for a new FHA insured mortgage. However, if there were extenuating circumstances, that were beyond the control of the borrower and the borrower has re-established food credit since the foreclosure, the lender may grant an exception to the three-year requirement. Extenuating circumstances include serious illness or death of a wage earner and docs would be required to support these circumstances. However, extenuating circumstances, DO NOT include the inability sell the house because of job transfer or relocation to another area.
Bankruptcy – A Chapter 7 bankruptcy does not disqualify a borrower from obtaining a FHA insured mortgage if at least two years have passed since the date of discharge. However, the borrower must have re-established good credit or chosen not to incur any new credit obligations. An elapsed time of less than two years, but NOT less than 12 months may be acceptable if the borrower can document extenuating circumstances beyond his or her control and has establish an ability to manage their financial affairs in a responsible manner. The lender must document the borrower’s situation causing the bankruptcy will not like re-occur.
Chapter 13 – does not disqualify a borrower from obtaining an FHA-insured mortgage. However, the lender must document one year of the payout period under the bankruptcy and the borrower’s payment performance under the plan must be satisfactory, (i.e. all required payments on time). The borrowers must receive permission from the court to enter into the mortgage transaction.
Consumer Counseling Payment Plans – Participation in a consumer counseling payment plan does not disqualify a borrower from obtaining a FHA-insured mortgage. However, the borrower must provide documentation that they have satisfactorily paid all payments under the plan for 12 consecutive months. Less than 12 months of payments is not acceptable. In addition, the borrower must receive written permission from the counseling agency to enter into the mortgage transaction.
About The Author
Joan Ewing - As an op-ed writer and active FHA DE Underwriter for the past 15 years, Joan Ewing is a proud NAMP® Certified Ambassador Loan Processor (NAMP®-CALP). Joan brings years of FHA Government experience to her writings, letting her readers tap into her underwriting knowledge base.