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FHA loan applicants are right to be concerned with issues related to outstanding judgments. Participating FHA lenders are required to abide by FHA minimum loan standards for creditworthiness and other factors.

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FHA Loan Articles

News and Updates for Homeowners

FHA Loan Applications and Outstanding Judgments

November 5, 2013 - One question that has come up more frequently in the last year or two about FHA loans and the borrower’s credit goes something like this:

“I have an outstanding judgment. Can I still get a loan?”

FHA loan applicants are right to be concerned with issues such as these. There are two basic areas to pay close attention to when reviewing your home loan options. One consideration is the FHA loan program’s rules and regulations, the other would be lending standards and requirements of the participating FHA lender.

Participating FHA lenders are required to abide by FHA minimum loan standards for creditworthiness and other factors. However, lenders are not prevented from requiring higher standards for credit scores, debt-to-income issues, and other financial qualifications, as long as those standards are applied in accordance with Fair Housing laws.

FHA loan program rules as listed in HUD 4155.1, Chapter Four Section C of HUD 4155.1 gives us a clue about the FHA stance on credit qualifications for an FHA loan:

“Past credit performance is the most useful guide to determining a borrower’s attitude toward credit obligations, and predicting a borrower’s future actions” when it comes to paying back the FHA mortgage loan on time.

Obviously, there’s a perceived lower risk factor for borrowers who have a history of timely bill payments and other good credit habits. If a borrower’s credit history, despite adequate income to support obligations, reflects continuous slow payments, judgments, and delinquent accounts, FHA loan rules state that “significant compensating factors will be necessary to approve the loan.”

Section C specifically mentions judgments by name, so it’s safe to assume that in such cases a borrower would need, as stated in Chapter Four, “significant compensating factors” such as large cash reserves, a larger down payment, or other factors that might work in the borrower’s favor.

If the FHA loan applicant is actively contesting such a judgment, standards for loan approval may be different. These situations are often handled on a case-by-case basis, so be sure to discuss the matter with your loan officer in detail before proceeding.