A reader asks, “There are two old debts from 2003 that I have not been able to verify on my credit report. The total of this is $520, the underwriter on the mortgage has been relentless about this debt. I will not pay for something that do not know what it is for. Does this affect my FHA loan?”
Reader questions like these come in quite often. Some of them seem to be asking whether the FHA has a rule that gets around a lender’s insistence on a specific issue connected with the FHA loan; a requirement such as a minimum waiting period following a bankruptcy proceeding or the example cited in the reader’s question here. Do FHA loan rules trump the financial institution’s policies in such cases? Can the FHA require a lender to ignore negative credit information or observe the FHA minimum seasoning period in cases like bankruptcy or foreclosure?
The short and simple answer is no. The FHA cannot force the lender to issue credit to someone not deemed a good credit risk, nor can the FHA require a bank to observe shorter seasoning periods following foreclosure, bankruptcy, etc.
The FHA can and does require its participating lenders to comply with certain standards and practices. The lender must comply with all federal, state and local laws, and must not violate the Fair Housing Act or Equal Credit Opportunity Act in its policies or procedures. But when it comes for standards such as credit history, seasoning periods, etc. the FHA minimums must be observed, but the lender is free to require stricter standards.
The short answer to the reader’s question? The lender’s issue must be addressed if the borrower wishes to move forward with the FHA loan. The lender can require the borrower to address the credit issue mentioned in the question; in such cases the bank is within its legal rights to require action on unresolved credit report issues as a condition of loan approval, assuming lender compliance with all federal/state/local laws regarding the matter. There is no FHA rule that would force the bank to overlook negative credit information to move forward with the loan.
Borrowers who need to contest such credit data because of erroneous information, identity theft, or other problems should contact the credit reporting agencies to start the process. Contesting a credit report can be a time-consuming process, but it’s well worth the trouble.
This is one reason why a borrower should start preparing for an FHA home loan at least one year in advance, pulling copies of his or her credit reports to look for issues such as these. The sooner you begin to work on any issues or problems, the easier time you’ll have when ready to commit to the purchase of your new home.
Do you have questions about the FHA home loan process? Ask us in our comments section.