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Your loan officer is required to show on paper that a potential borrower can afford both monthly financial obligations owed currently, plus the amount of those financial commitments with the added the amount of a potential new monthly mortgage payment.

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FHA Loan Articles

News and Updates for Homeowners

FHA Loan Rules: Credit Report Inquiries

FHA Loan Rules: Credit Report Inquiries
June 22, 2016 - Are you thinking about your options for buying a home with an FHA mortgage? If so, do you know how much money you have coming in versus how much you have going out each month to cover your financial obligations? A mortgage loan applicant’s debt-to-income ratio is a very important factor in loan approval.

Your loan officer is required to show on paper that a potential borrower can afford both monthly financial obligations owed currently, plus the amount of those financial commitments with the added the amount of a potential new monthly mortgage payment.

Your lender will examine all existing debt and compare it with “verifiable income” as it’s called in the FHA loan rule book. This comparison is to determine the percentage of the applicant’s income is taken up by bill payments each month. That percentage must fall within the lender’s standards for the loan as well as FHA loan program minimum requirements.

But what about a borrower’s potential future debt? Could this be a factor in the decision to approve or deny an FHA home loan? There are things that could indicate the possibility of future debt to a lender. What are they?

Participating FHA lenders have the borrower’s permission to access to the applicant’s credit reports. That allows the loan officer to see what current FICO scores are plus the applicant’s credit history, but also to view any credit inquiries such as those that may occur when you apply for a new credit card, etc.

If there has been a recent inquiry for a line of credit that is not yet on the credit report in terms of payments, the rules in  HUD 4000.1 tell the lender what to do next:

“The Mortgagee must review all credit report inquiries to ensure that all debts, including any new debt payments resulting from material inquiries listed on the credit report, are used to calculate the debt ratios. The Mortgagee must also determine that any recent debts were not incurred to obtain any part of the Borrower’s required funds to close on the Property being purchased.”

The FHA rules here also include a definition for what the FHA considers a “material inquiry”:

“Material Inquiries refer to inquires which may potentially result in obligations incurred by the Borrower for other Mortgages, auto loans, leases, or other Installment Loans. Inquiries from department stores, credit bureaus, and insurance companies are not considered material inquiries.”

There are many reasons for the lender needs to check on material inquiries, not all of which are related to the borrower’s debt or potential debt. For example,  down payment funds cannot come from a credit card cash advance or any type of “unsecured loan”. If a participating lender sees a credit inquiry on the credit report, it may be necessary to insure that inquiry is not related to the down payment funds as per HUD 4000.1.

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