Recently, I had a well qualified buyer with a great job, no debts, solid savings, and no credit history. This very responsible, hard-working individual had paid off her school loans and car. All that sounds fantastic, doesn't it? Yet, my buyer client encountered difficulty in obtaining an FHA loan, something which surfaced "in the eleventh hour" prior to settlement. Needless to say, the buyer had to switch lenders to find one willing to take a risk on her loan. This caused considerable stress and frustration to both the buyer and seller. Interest rates increased after the rate lock expired. The seller's new home purchase had to be delayed, too.
Suffice it to say, that there appears to be some room for interpretation by underwriters and mortgage institutions, as I have come to learn.
Please read these FHA guidelines carefully in order to counsel your first-time home buyers early on about having established credit.
The borrower's most recent 2-year credit history will receive the closest scrutiny, whether by an Automated System or an FHA Underwriter. The borrower's overall performance in paying debts as agreed will be evaluated. If the file is approved by AUS, the findings may be utilized as conditions. For manual underwriting, the FHA Underwriter must consider the risk and compensating factors to override an Automated System referral, or underwrite a Borrower who has no credit profile yet established.
If a borrower has no established credit history, the Lender MUST develop a credit profile from alternative sources such as rent, utility bills, rental payments, etc. The basic hierarchy of credit evaluation is the manner of payments made on:
- Rental payments (direct verification or cancelled checks to cover the past 12 months with no lates).
- Utilities - Verify the same as rental payments.
- Installment debts (verify no late payments in past 12 months). Count the monthly payment of all debt with 10 months or more remaining in the debt ratio. If the debt will be paid off earlier than 10 months, but the monthly payment exceeds 2% of the gross monthly income of the Borrower, the ratio should reflect this debt and be analyzed accordingly in the credit decision.
- Revolving accounts (including store accts). Evaluate case by case. Use the monthly payment on the credit report if shown, or obtain a copy of the billing statement if the Borrower pays less than the "rule of thumb" 5% of balance per month.