FHA Loans And Your Credit History

June 8, 2011

Some borrowers are afraid to apply for an FHA home loan because of past credit mistakes. It is not hard to assume worst about your credit score, credit history, and what an FHA approved lender is looking for when reviewing the loan application.

When the loan application or pre-approval form is filed, the FHA lender reviews the applicant's credit reports. While a few late credit card payments or other minor issues in the past may show up on the record as part of that review, these aren't necessarily enough to condemn the borrower or have an application rejected.

There is no chart or formula for counting credit issues and a cut-off assigned for how many late payments are too many. Instead, FHA rules give the lender some flexibility to interpret the credit history of a borrower. "Minor derogatory information occurring two or more years in the past does not require explanation."

But larger problems do require explanation. There are plenty of situations where even a larger credit issue is not enough to rule out an FHA insured home loan. "Major indications of derogatory credit-including judgments, collections, and any other recent credit problems," the FHA official site says, "require sufficient written explanation from the borrower. The borrower's explanation must make sense and be consistent with other credit information in the file."

What about in cases where the applicant has little or no credit history?

FHA rules still provide a way to be considered for a home loan. "For those borrowers, and for those who do not use traditional credit, the lender must develop a credit history from utility payment records, rental payments, automobile insurance payments, or other means of direct access from the credit provider. The lender must document that the providers of non-traditional credit do, in fact, exist and verify the credit information."

Credit history in such cases may include public records or other "objective" sources. In all cases, "To verify the credit information, lenders must use a published address or telephone number for that creditor"

The FHA adds, "As an alternative, the lender may elect to use a non-traditional mortgage credit report developed by a credit-reporting agency, provided that the credit reporting agency has verified the existence of the credit providers and the lender verifies that the non-traditional credit was extended to the applicant."

If you come to the FHA loan application process with no late payments, you're considered an acceptable risk, generally speaking. An applicant with limited credit history who can show some kind of reliable payment history is more likely to be approved for an FHA insured mortgage because there is some evidence of your performance as a borrower.