In analyzing a borrower’s credit and
applying the FHA credit requirement, past
credit performance serves as the most useful guide in
determining the attitude toward credit obligations. A borrower
who has made payments on previous or current obligations in a
timely manner represents a reduced risk. Conversely, if the
credit history, despite adequate income to support
obligations, reflects continuous slow payments, judgments, and
delinquent accounts, strong compensating factors will be
necessary to approve the loan.
When an underwriter looks at a borrower's
Credit Scores, it is the overall pattern of credit behavior
that must be examined rather than isolated occurrences of
unsatisfactory or slow payments causing bad credit. If a borrower had a period of
financial difficulty in the past, this does not necessarily
mean that the loan will be denied, particularly if a good
payment record has been maintained since.
When bad credit accounts are revealed, the
underwriter is looking to determine if the cause of the late
is due to financial mismanagement or extenuating
circumstances. There is a big difference between these two
items which will be discussed later
Most underwriters will ignore minor
derogatory information occurring two or more years ago.
However, major indications of derogatory credit, including
judgments and collections, and any other recent credit
problems, require sufficient written explanation from the
borrower. The borrower's explanation must make sense and be
consistent with other credit information in the file.
Underwriters will look very closely to make sure that all
dates correspond to the explanation
The basic hierarchy of credit evaluation is
the manner of payments made on previous housing expenses,
including utilities, followed by the payment history of
installment debts then revolving accounts.
Generally, an individual with no late
housing or installment debt payments should be considered as
having an acceptable credit history unless there is major
derogatory credit on his or her revolving accounts.
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