Summary: This article explains the credit report requirements for FHA loans, as of January 1, 2015. It is based on guidelines and requirements outlined in HUD Handbook 4155.1, as well as their Single-Family Housing Policy handbook.
The Federal Housing Administration (FHA) loan program is managed by the Department of Housing and Urban Development, or HUD. It is HUD that establishes all guidelines for borrowers and lenders that participate in the program. According to the department’s 2015 guidelines, FHA lenders must obtain a credit report for each borrower who will be named on the mortgage note.
What Is a Credit Report?
Your credit report is basically a documented history of how you have borrowed and repaid money in the past.
For example, when you take out a loan or obtain a credit card, the creditor who extends financing to you will report the account to the three credit-reporting bureaus. This is how your reporting history is “born.”
There are three companies that maintain consumer credit reports in the United States – Experian, Equifax, and TransUnion. You have three different reports, one produced by each of these companies.
How They Affect You During the Mortgage Process
Here’s how your credit report affects you when applying for an FHA loan. The information contained within your report is used to produce a three-digit numerical score. This is referred to as your credit score. You have three of these as well, one for each of the companies mentioned above.
FHA mortgage lenders use these scores as indicators of risk. A higher score indicates a lower risk, while a lower score indicates a borrower who is a higher risk to the lender. As a result, a higher score can help you get approved for an FHA loan. A lower number can make it harder to get approved, or could result in a loan denial.
But it all starts with your credit reports. The information they contain serves as a building block for that all-important, three-digit score. If you have negative information within your credit report, such as missed payments, delinquencies or defaults, it will result in a lower score. This in turn will make it harder to get approved for an FHA loan.
FHA Requirements for Credit Reports (2014 – 2015)
The official HUD handbook for 2015 states that mortgage lenders must obtain a credit report for each borrower who applies for an FHA loan. These requirements can be found in HUD Handbook 4155.1, Chapter 1, Section C. Here is an excerpt from the official guidelines for FHA credit reports:
“The mortgagee [i.e., the lender] must obtain a report for each borrower who will be obligated on the mortgage note … reports must contain all information from at least two repositories [TransUnion, Experian and Equifax] pertaining to credit, residence history, and public records information; be in an easy to read and understandable format; and not require code translations.”
When it comes to mortgage lending, there are two types of traditional credit reports:
- Three Repository Merged Credit Report (TRMCR), also known as a “tri-merged” report
- Residential Mortgage Credit Report (RMCR)
The Department of Housing and Urban Development (HUD) requires FHA lenders to obtain the TMCR, at a minimum. If necessary, the lender can also use an RMCR “from an independent consumer-reporting agency.” To learn more about these reporting requirements and guidelines, refer to the official handbook mentioned above.
You Can Check Them for Free – And You Should
Federal laws entitle you to receive one free credit with report per calendar year, from each of the credit reporting companies mentioned above.
According to the Fair Credit Reporting Act (U.S. Code 15, Section 1681):
“All consumer reporting agencies described in subsections (p) and (w) of section 603 shall make all disclosures pursuant to section 609 once during any 12-month period upon request of the consumer and without charge to the consumer.”
Translation: Experian, Equifax and TransUnion must provide you with one free report every 12 months, but only if you request it.
If you are planning to apply for an FHA loan in the near future, you would be wise to check your credit reports before submitting a loan application. If you have erroneous information within your file(s), it could result in a lower score. This could hurt your chances of getting approved for an FHA-insured mortgage loan.
If you do a Google search for “free credit reports,” you’ll be overwhelmed by the number of websites that offer them. Most of these websites want you to sign up for some kind of monitoring service, or an ID-theft-prevention service. The official website for obtaining your free reports is AnnualCreditReport.com. This website is jointly owned by TransUnion, Experian and Equifax. It’s also monitored and regulated by the Federal Trade Commission (FTC).
This article explains current guidelines and requirements for FHA credit reports. If you would like to learn more about this subject, please refer to the various HUD handbooks mentioned within the article.