Less than perfect maybe- but not "Bad Credit"
What is "bad credit?" Bad credit is where an individual(s) have a disregard for paying their credit obligation in a timely manner. It means there are numerous 30 day late payments, collection accounts, charge offs, judgments, bankruptcy less than 24 months old and foreclosure less than 36 months old. It can mean that there are tax liens, delinquent child support and possibly garnishments. Medical collections are not always considered as a disregard for credit as a lot of the time these are only minimal balance and sometimes these accounts were reported to the credit bureau without the client even knowing it and as a result of non-insurance payments. It also can mean that the individual may not have health insurance and some extensive illness allowed these collections. These can turn into judgments sometimes and if a person buys a house, these could be placed as a lien on the subject property. Judgments must be paid at closing so that the lender has a first lien position.
FHA (Federal Housing Administration) â€“ FHA's standard analysis is called the four (4) C's: Credit history, capacity to repay the debt, cash to close and the collateral. FHA changes are in process and are become more strict daily. RESPA rules have changed also and this is definitely to the consumer's advantage in some ways, if it is understood.
FHA does not make "bad credit" loans. They make loans to less than perfect credit borrowers but there is a limit to extenuating credit problems which will be approved. FHA just like conventional (Fannie Mae and Freddie Mac) loans are submitted to AUS (automated underwriting system) for a determination of credit worthiness. This means that the borrower's full application information is entered into the automated system; income, assets, down payment funds, savings, checking, retirement accounts and the credit report information is pulled through this AUS.
Past credit performance serves as a guide and is analyzed to see how the applicant has met their obligations within the past 24-36 months primarily. Slow payments, judgments and delinquent (excessive) do not represent a regard for their credit. All lenders will pull a tri-merged credit report, meaning from all three major credit agencies. Transunion, Equifax and Experian. Each of these bureaus stores credit information which has been reported from the institution which has extended credit to the individual. If an individual has been 30/60/90 days late paying the account it is reported as such. Sometimes it is duplicated from each bureau. If an account has been charged off, becomes a collection or judgment, it will be reported as such. When applying for a mortgage, the lender will always pull this tri-merged credit report. Sometimes if there are disputes about a credit issue, the lender will order a MRCR, mortgage residential credit report and that means that each account is evaluated and the creditor is contacted for any issues out of the ordinary to obtain the correct information. A rental or previous mortgage payment history is imperative (unless living with parents). There should be no late payments verified on these within the past 12 months. This would be very unfavorable and it excessive, the loan would not be made.
Minor derogatory credit information does not necessarily indicate a loan will not be approved or made, but it does mean that the derogatory issues will be evaluated for extenuating circumstances and for the number of delinquent accounts. An explanation from the borrower is required for "any" derogatory credit within the past 24 months. If necessary, documentation may be required to back up the explanation.
FHA has determined that neither lack of credit nor a borrower who has chosen not to use credit is a determination for not making a loan. In this case the lender is required to obtain a non-traditional credit report with credit lines for phone, rent (if applicable), utilities, department store that does not report to the bureau, car insurance, or rental insurance. There should be at least a 12 month history for these accounts, and at least four (4) lines of credit; depending upon the situation, less than 12 months on some accounts may be allowed. It depends upon the overall credit file and the borrower's income stability, reserves with the ability to repay the debt.
The AUS will evaluate the credit and entire financial position of the borrower and will spit out a recommendation for: Approval, Refer to an underwriter for full evaluation, Refer with Caution or out of scope. This depends upon amount of late payments (if any), reserves after closing and also the property is evaluated within the AUS after the appraisal has been submitted and gone through the underwriter. If a loan is referred to the underwriter, he/she must see if the loan can be approved outside of the AUS. There are certain credit standards the lender may haveâ€¦for instance the lender may not make a loan with a score less than 600. The underwriter weighs the entire file and determines the three C's are met and includes compensating factor for that approval and signs off on the file becoming the responsible party for the lender. If the file is audited by FHA, the underwriter may have to explain their decision. Normally a "refer with caution" recommendation does not get approved.
When the AUS spits out the recommendation; it is the FHA DE Underwriter's obligation to make sure the information submitted to the system is accurate and precise. If it is not then the lender is liable for the loan if it goes delinquent and is proven by FHA when audited. In any given underwriting situation, the underwriter must still review the entire to determine the overall creditworthiness of the borrower and that the files meet the three C's mentioned above. If something changes, income, assets, reserves, the information submitted to AUS must be changed and AUS run again. If the automated system refers the loan to an underwriter for a final decision
Credit plays one of the most important rolls in a loan approval, but it is not the only roll. If someone has minor credit issues (not bad credit), but has reserves after closing, 2 years or more on their current job, it makes for a stronger capacity to repay the loan.
There are many steps to getting a loan to approval and I still have not addressed them all. FHA has guidelines to meet more of the low to moderate income communities. They were originated to meet these communities overall. FHA like FNMA/FHLMC changed their guidelines to meet more of the "challenged borrowers" during the Subprime hiatus, just like the other agencies, but they are slowly changing approval criteria more to the industry standard. FHA is not what I would call an easy loan for someone to get. FHA actually has more stipulations than Conventional lending. The underwriter must have a special designation to underwrite FHA loans. They are trained and are responsible for making sure the loans are acceptable to FHA. Any DE underwriter that I have known takes their designation seriously and does not approve loans that are not acceptable or meet FHA guidelines. In any given situation, each loan file is unique and may need special consideration in many circumstances. There are some things that are cut and dried; then there are some things that are not; but FHA does not make "bad credit" loans.