History

• Credit history is a vital part of credit requirements for FHA loans. A lender will examine the credit history of any applicant and look at three key figures. The first figure involves regular payments versus late payments. A person who pays regularly without accruing late charges shows solid reliability in repaying their loan. The second figure the lender will examine in credit history is the debt ratio. If a person's outstanding debt is higher than their income will allow them to pay down reasonably, then it affects their overall credit score. The final credit history figure examined is the number of defaulted credit loans including repossessions.
  
  

Significance

• Credit requirements for an FHA loan may be waived in the event that a borrower meets specific criteria. For example, while two previously established lines of credit are necessary towards FHA loan approval, it is possible for the lender to approve substitute forms of credit. For example, if a borrower filed Chapter 13 bankruptcy, they can still be eligible for an FHA loan if they have been making their bankruptcy payments regularly without interruption for at least one year. The borrower will be required to receive their court trustee's approval as well as provide a written explanation for their filing bankruptcy in the first place.
  
  

Types

• Employment stability and fiscal responsibility are critical to FHA loan approval. FHA lenders may have their loans insured by the government (which helps to protect the borrower and the lender), but they are still subject to credit approval and certain guarantees that the borrower is a reasonable risk. According to FHA guidelines, a chapter 7 bankruptcy requires at least two years from the discharge of the bankruptcy before consideration of an FHA loan can begin. Most FHA lenders prefer to see applicants who have a history of solid employment (1 or more years) at the same job and no history of frequently changing jobs (no more than 2 jobs in 5 years).
  
  

Misconceptions

• Just because a loan is FHA insured does not automatically mean every person is eligible for the loan. Job and credit history are important as is the debt to income ratio. Credit problems occur when borrowers overextend themselves by taking out too much credit and experience difficulty in paying back the borrowed funds. One month of late payments can reflect badly on credit history, two or more months of late payments can lead to more than just late fees, but a definite black mark on a person's credit score. However, consistent and regular payments are not a guarantee of a positive credit score if the borrower is already high in debt. Regular payments may prevent collection calls and late fees, but the high debt can "tie up" the credit score and prevent approval.
  
  

Considerations

• When considering FHA loan credit requirements or applying for a loan, examine the amount of outstanding credit the applicant already has. The average acceptable debt to income ratio is 30 to 40%. Debt ratio that exceeds 50% of the applicant's income will make them a poor candidate for loan approval. Debt ratio is determined by the amount of payments made each month versus the amount of income. A solution to this high debt ratio is to pay down outstanding credit cards and reduce the amount of debt owed.