How Your Credit Report Affects Your FHA Loan

July 5, 2012

There are many common questions about FHA loans, credit reports, and credit requirements. One typical question involves old, outdated, or possibly inaccurate data on a loan applicant's credit history.

"I have old debts that I have not been able to verify on my credit report. My lender is very unforgiving about this, but I shouldn't be expected to pay for a debt I probably don't really owe. Does this affect my FHA loan?"

Reader questions like these often seem to be asking whether the FHA has a rule that helps the borrower get around the lender's requirement to settle a disputed debt listed on the credit report. Do FHA loan rules trump the financial institution's policies in such cases? Do FHA loan requirements force a lender to ignore negative credit information?

No.

FHA loans are offered as a voluntary government program supported by participating lenders. While the FHA does have minimum standards, and requires participating financial institutions to abide by federal, state, and local laws, it cannot require a participating lender to issue credit to someone not deemed a good credit risk. The FHA also does not require lenders to observe shorter "seasoning periods" or mandatory waiting times following foreclosure and bankruptcy. Each bank has its own standards. FHA minimums are part of those standards where applicable, but the lender is free to set more stringent requirements.

When it comes to old, inaccurate, or wrongly reported credit report data, a lender may require the borrower to address that situation as a condition of loan approval. There is no FHA rule that would force the bank to overlook negative credit information to move forward with the loan.

Some credit reports turn up evidence of identity theft, others haven't updated to reflect paid-off debts or judgments, still others may have erroneous data that's actually somoene else's credit problems wrongly attributed to a different borrower. In all these cases the credit reporting data must be contested--a time consuming process.

That's why borrowers are encouraged to start pulling their own credit reports at least one year ahead of time before moving forward with an FHA guaranteed mortgage loan--any problems can be resolved during the preparation phase, even if the resolution takes many months to work through. Don't be surprised if when contesting a credit report you are asked to file a report with the credit bureau, a police report where appropriate, and discuss issues with a fraud investigation team if necessary.

This process can be time consuming, but ultimately is well worth the effort. You'll find your journey into home ownership with an FHA loan much easier when you know your credit report data is accurate and up to date.