You might think that your credit report is just a way to show a lender what your credit score is, but in reality, it is like giving a lender a magnifying glass into your financial life. Anything and everything you have done in the past 7 to 10 years that pertain to your finances will show up on the credit report. FHA lenders use this information to accurately evaluate your financial position to determine if you are eligible for an FHA loan.
One of the first things that surprise many people is the residential history that appears on their credit report. Since where you lived over the last two years, at a minimum, is important to FHA lenders, this information is very helpful to them. It lets them see how many times you moved and then prompts them to ask the appropriate questions to determine the reason. For example, if you were a renter and you kept getting evicted because you were not paying your rent on time, the lender needs to know this. They will obviously find out with the Verification of Rent that they need to perform in order to establish your housing history payments, but the credit report will help them get an honest answer right away. If you do not have at least a 2-year history on your credit report, the lender will inquire your whereabouts for that time.
There are three different types of public records that can show up on your credit report – each of which are financial in nature. You are probably already aware of how a bankruptcy could affect your credit report. There are two types of bankruptcies, each of which remain on your credit report for a different length of time:
- Chapter 7 – This is the bankruptcy where your debts are forgiven. This bankruptcy remains on your credit report for 10 years.
- Chapter 13 – This is a restructuring of your debts, making them easier to pay off. This bankruptcy remains on your credit report for 7 years.
The other two types of public records that report on your credit report include:
- Tax liens – This could be property taxes, federal or state taxes. Any taxes that go unpaid for a long period of time could end up in a lien, which means the government has rights to the equity in your property, meaning you probably cannot sell or refinance without paying them off first. The lien reports on your credit report for 10 years, but if you pay it off, it remains there for 7 years.
- Civil judgment – This is a lawsuit that someone brought against you in order to get the money back that they feel they are owed. If you pay the judgement off, it will be updated accordingly. The judgment will still show, but it will show that it is satisfied.
Any credit inquiries that you make within the last 3 months will report on your credit report as well. This could serve as a red flag to a potential lender if there are several inquiries performed recently. It means that you have applied for other credit lines or forms of financing. It is the job of all FHA lenders to determine if any subsequent financing occurred as a result of the inquiries. Because new credit lines and other forms of financing can take a while to start reporting on the credit report, the lender may need to ask for proof that no new accounts occurred as a result of the inquiry. If there is a new account, it does not mean that you will be ineligible for an FHA mortgage; it simply means that the new loan will need to be figured into the debt ratio that the lender calculates for you.
Any foreclosures you experienced within the last 7 years will also report on the credit report. FHA loans are one of the most forgiving when it comes to a foreclosure, so do not worry if you have one on your credit report. Typically, FHA lenders will require you to wait 3 years from the date of the sale of your home before you can get a new FHA loan. But, the FHA Back to Work Program does allow for extenuating circumstances. For example, if you were laid off due to your company’s closing and were unable to keep up with your housing payments, you might be eligible to show that you obtained a new job and got your financial life back on track. If you fit into the Back to Work guidelines and do not show a pattern of poor credit history aside from that point in time, you might only have to wait 12 months after the foreclosure to get a new FHA loan.
The last thing that reports on your credit report, which is quite obvious, is your open credit. Each credit line will have a plethora of information about the debt. This information includes the date the debt began, the highest credit amount you are allowed, the amount of the minimum payment, the amount outstanding, and the dates of your recent payments. This is where FHA lenders can determine how many late payments you have as each trade line will show the number of 30, 60, and 90 day late payments that you have.
As you can see, your credit report is like a window into your financial life. It gives FHA lenders the opportunity to know what is really going on in your life to help determine if you can afford the new FHA mortgage that you applied for. Knowing that your financial life is like an open book, it pays to be open and honest with your lender so that they can help you have the highest chances of getting approved for an FHA loan. Every lender will work differently, so do not be afraid to shop around with different lenders that offer FHA loans to determine the right program for you.