FHA Borrower Credit History Analysis
Analyzing Borrower Credit
The FHA loan approval process is based on the philosophy that past credit history demonstrates most effectively a borrower’s attitude towards paying their bills and credit obligations and acts as an effective predictor of a borrower’s future action. FHA allows for more tolerance regarding past derogatory credit history, but previous poor credit performance typically must be accompanied by reasonable, thorough letters of explanation from the borrower.
In order to demonstrate that they use prudent underwriting practices, FHA underwriters will review the credit history to determine whether past instances of derogatory credit show a pattern of poor credit behavior or are the result of reasonable isolated occurrences. FHA lenders are required to document their analysis of delinquent accounts and late payments and document their conclusion as to whether or not they were based on a disregard for financial obligations, an inability to manage debts or factors beyond the borrower’s control.
FHA underwriters will pay attention to the hierarchy of credit. What that means is that the most emphasis is placed on the review of previous housing expenses, followed by payments on installment debts (ex. auto loans and student loans), and then revolving debts (credit cards).