How a Lender Reviews A Credit Report for An FHA Loan

Underwriting from one lender to another varies slightly, but these are the basic
guidelines they use and a good example to direct your attention before you pay for a
mortgage credit report.
1.
Start with the basics:
Review the applicant’s name, address, social security number, and date of birth.
What does the applicant’s employment information reveal about his or her earning
potential? A stable employment history indicates that the applicant is likely to
earn the funds necessary to repay the loan. Mismatches of the applicant’s basic
information with other documents or a former address close to the new property
are red flags. 
2.
Payment history:
An applicant’s housing obligation payment history is an indicator of how he or
she will handle mortgage payments in the future.  Look out for late rent or
mortgage payments. Were these exceptions, or did the applicant frequently make
late payments? To qualify for a loan, applicants should not have more than one
late housing obligation payment in the past 12 months, but some lenders do not
make an exception so you should ask the loan officer before making an
application.

“The lender must verify and document the previous 12 months’
housing history even if the borrower states he/she was living
rent-free.” 

Beaware that private mortgages and other housing payments may not show on the
credit report. Always ask for cancelled rent checks, rental ledgers, VORs, VOMs,
copies of money orders, and the like, to ensure good insight into an applicant’s
housing obligation payment history. 

3.
Debt-to-income ratio/amount owed vs. credit available for FHA
applicants:
An aggressive lender accepts ratios between 31 percent (front end) and 43
percent (back end). Higher ratios need AUS (automated underwriting systems)
approval. When applying for a loan  installment debt with less than ten
payments remaining may be excluded from the ratio, as long as the monthly
payment does not negatively impact the applicant’s ability to make mortgage
payments on time once the loan closes. In addition, an applicant with
installment debt must have at least three months worth of liquid funds. Federal
student loans may be excluded from the ratio if it they are deferred over 12
months after closing.
4.
Credit history:
Does the applicant have a history long enough to allow for predictions about his
or her ability to repay a loan? How frequent are late payments? How high is the
past due amount? Are derogatory items current, or are they from the past? Are
there are signs of improvement in the applicant’s credit history? Take all this
into consideration when evaluating the applicant’s credit history.
 
“Generally,  a borrower is considered to have an acceptable credit history if he/she does not
have late housing or installment debt payments, unless there is major derogatory
credit on his/her revolving accounts.”

5.
Courthouse records section/public records:
Red flag items like bankruptcies and bank liens are listed in this section. To
qualify for a loan, all judgments must be either satisfied or placed into an
agreeable repayment plan. Applicants must provide evidence that payments were
made in accordance with the agreement for a minimum of three months. Mortgage
foreclosures may be acceptable if they happened at least three years ago. The
minimum discharge for bankruptcies is two years. Under certain circumstances,
the minimum requirement for foreclosures and bankruptcies can be reduced, as
stated in the HUD handbook 4155.1.
 
Instead of solely focusing on a client’s credit score rating,
some lenders look at the bigger picture when assessing the risk of a loan.  
Companies that retain servicing rights, have the flexibility to evaluate and
identify credit-worthy borrowers who are  not readily apparent to large
corporate underwriters.