Guidelines for Credit Report Review (05/10/09)
Introduction
This topic contains information on the credit report items for lenders to review, including
• the hierarchy of credit review
• the review of previous rental or mortgage payment history
• recent and/or undisclosed debts and inquiries
• collections and judgments
• paying off collections and judgments
• previous mortgage foreclosure
• Chapter 7 bankruptcy
• Chapter 13 bankruptcy
• consumer credit counseling payment plans
• use of truncated SSNs on credit reports, and
• a reference for information on evaluating non-traditional/insufficient credit.
Change Date
May 10, 2009
4155.1 4.C.2.a Hierarchy of Credit Review
The basic hierarchy for evaluating credit involves reviewing how payments were made on the
following:
• previous housing expenses, including utilities, then
• payment history on installment debts, then
• payment history on revolving accounts.
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.
4155.1 4.C.2.b Reviewing Previous Rental or Mortgage Payment History
The borrower's housing obligation payment history holds significant importance when evaluating credit. The lender must determine the borrower's housing obligation payment history through the:
• credit report
• verification of rent directly from the landlord (for landlords with no identity-of-interest with
the borrower)
• verification of the mortgage directly from the mortgage servicer, or
• the review of canceled checks that cover the most recent 12-month period.
4155.1 4.C.2.c Recent and/ or Undisclosed Debts and Inquiries
Lenders must determine the purpose of any recent debts as the indebtedness may have been
incurred to obtain the required cash investment.
A borrower must provide a satisfactory explanation for any significant debt that is shown on the
credit report, but not listed on the loan application.
Written explanation is required for all inquiries shown on the credit report for the last 90 days.
Total Scorecard Accept Recommendation
• verify the actual monthly payment amount
• include the monthly payment amount and resubmit the loan if the liability is greater than
$100 per month (Note: Direct verification is not required), and
• determine that any funds borrowed were
Reference: For more information on the TOTAL Scorecard recommendation, see Page 17 of the
TOTAL Scorecard User's Guide.
4155.1 4.C.2.d Collections and Judgments
Collections and judgments indicate a borrower's regard for credit obligations, and must be
considered in the creditworthiness analysis.
The lender must document reasons for approving a mortgage when the borrower has collection
accounts or judgments. The borrower must explain, in writing, all collections and judgments.
Total Scorecard Accept Recommendation
Collection accounts trigger neither an explanation requirement nor a hypothetical monthly
payment to be used in qualifying borrowers. The presence of collection accounts in the
borrower's credit history already result in lowering the credit bureau scores used in TOTAL and, thus, no further information need be provided by the borrower.
Reference: For information on paying off collections and judgments, see HUD 4155.1 4.C.2.e.
4155.1 4.C.2.e Paying off Collections and Judgments
FHA does not require that collection accounts be paid off as a condition of mortgage approval.
However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA
insurance endorsement.
Exception: An exception on a court-ordered judgment may be made if the borrower:
• has an agreement with the creditor to make regular and timely payments, and
• has provided documentation indicating that payments have been made according to the
agreement.
Total Scorecard Accept/Refer Recommendation
TOTAL Scorecard Accept and Refer recommendations require that the lender obtain evidence of payoff for any outstanding judgments shown on the credit report.
Reference: For more information on the TOTAL Scorecard recommendation, see Page 18 of the
TOTAL Scorecard User's Guide.
4155.1 4.C.2.f Previous Mortgage Foreclosure
A borrower is generally not eligible for a new FHA-insured mortgage when, during the previous
three years:
• his/her previous principal residence or other real property was foreclosed, or
• he/she has given a deed-in-lieu of foreclosure.
Exception: The lender may grant an exception to the three-year requirement if the foreclosure
was the result of documented extenuating circumstances that were beyond the control of the
borrower, such as a serious illness or death of a wage earner, and the borrower has reestablished good credit since the foreclosure. Divorce is not considered an extenuating
circumstance. However, the situation in which a borrower whose loan was current at the time of
a divorce in which the ex-spouse received the property and the loan was later foreclosed
qualifies as an exception.
Note: The inability to sell the property due to a job transfer or relocation to another area does
not qualify as an extenuating circumstance.
4155.1 4.C.2.g Chapter 7 Bankruptcy
A Chapter 7 bankruptcy (liquidation) does not disqualify a borrower from obtaining an FHAinsured mortgage, if at least two years have elapsed since the date of the discharge of the
bankruptcy. During this time, the borrower must:
• have reestablished good credit, or
• chosen not to incur new credit obligations.
An elapsed period of less than two years, but not less than 12 months may be acceptable for an
FHA-insured mortgage, if the borrower:
• can show that the bankruptcy was caused by extenuating circumstances beyond his/her
control, and
• has since exhibited a documented ability to manage his/her financial affairs in a
responsible manner.
Note: The lender must document that the borrower's current situation indicates that the events
that led to the bankruptcy are not likely to recur.
4155.1 4.C.2.h Chapter 13 Bankruptcy
A Chapter 13 bankruptcy does not disqualify a borrower from obtaining an FHA-insured
mortgage, provided that the lender documents that:
• one year of the payout period under the bankruptcy has elapsed, and
• the borrower's payment performance has been satisfactory and all required payments have
been made on time.
The borrower must receive written permission from the court to enter into the mortgage
transaction.
Total Scorecard Accept Recommendation
Lender documentation must show two years from the discharge date of a Chapter 13
bankruptcy or the loan must be referred to an underwriter.
Reference: For more information on the TOTAL Scorecard recommendation, see the TOTAL
Mortgage Scorecard User's Guide.
4155.1 4.C.2.i Consumer Credit Counseling Payment Plans
Participating in a consumer credit counseling program does not disqualify a borrower from
obtaining an FHA mortgage, provided the lender documents that:
• one year of the pay-out period has elapsed under the plan, and
• the borrower's payment performance has been satisfactory and all required payments have
been made on time.
The borrower must receive written permission from the counseling agency to enter into the
mortgage transaction.
Total Scorecard Accept Recommendation
The borrower's decision to participate in consumer credit counseling does not trigger a
requirement for additional documentation since the credit scores already reflect the degradation
in credit history. The borrower's credit history, not voluntary participation in consumer credit
counseling, is the important variable in scoring the mortgage and, thus, no explanation or other
documentation is needed.
4155.1 4.C.2.j Use of Truncated SSNs on Credit Reports
In an effort to reduce the risk of identity theft and other forms of financial fraud, some providers
of consumer credit reports have begun using a truncated version of an individual's Social
Security Number (SSN) on the credit report product that is offered.
A truncated SSN, that contains as few as the last four digits of a borrower's full number, is
acceptable for FHA mortgage insurance purposes provided that:
• the loan application captures the full 9-digit SSN, and
• the borrower's name, SSN and date of birth are validated through the FHA Connection or
its functional equivalent.
4155.1 4.C.2.k Evaluating Nontraditional/ Insufficient Credit Reference
For guidelines for evaluating borrowers with nontraditional or insufficient credit histories, see
HUD 4155.1 4.C.3.
"Making Real Estate Simple!"
Barbara Ann Wibe, e-PRO, REALTOR
Cell: 619.850.4174 e-Fax: 619.512.5156
www.Barbarainc.com
Barbarainc@gmail.com
Coldwell Banker Nautilus Real Estate
7061 Clairemont Mesa Blvd. Suite 218
San Diego Ca 92111
Lic. #01742839
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