The Impact of Late Payments on FHA Loan Approval
June 20, 2023
Today's economic landscape is compounded by factors like inflation and rising utility expenses. These are additional hurdles tacked onto other post-pandemic problems that make securing a home loan an uphill battle for some. If you find yourself on the brink of missing payments on your rent or mortgage, the stakes become even higher, especially if you're eyeing an FHA home loan.
For those hoping to buy a home or refinance with an FHA mortgage, try to maintain a clean payment record for at least 12 months before starting the loan application process. Doing so with less than a year of timely payments on your credit history significantly complicates the approval process. Late or missed payments on housing expenses are a red flag, making it challenging for lenders to justify approving your loan.
The FHA Handbook, specifically HUD 4000.1, enforces the "12-month rule," stipulating that, depending on circumstances, the loan must be "downgraded to a refer" and "manually underwritten" if late or missed payments on a mortgage occurred within the 12 months leading up to the application. The FHA provides no leniency in this regard.
While there may be some consideration in cases where FICO scores and other financial qualifications remain strong, the risk of denial increases if the loan is downgraded to a refer status. However, some leniency may be granted if the late or missed payment is a one-time issue, provided it can be adequately documented.
Ultimately, the lender's discretion plays a significant role, and borrowers with any late or missed payments in the last 12 months might consider delaying their loan application until they've achieved a full year with no such issues. This cautious approach could prove to be the pivotal factor in securing loan approval.
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