Federal Housing Administration rules for home loans protect the lenders' financial interests, which also helps to protect the FHA's own financial interests. A borrower seeking an FHA-backed loan undergoes most of the same credit-qualifying procedures as a borrower getting conventional mortgage financing. FHA lenders can pull credit more than once, and usually do check credit toward the end of a sale or refinance to avoid lending to overextended borrowers.
Not Just Checking
The credit report analysis represents a significant part of the loan qualifying process for an FHA-insured loan. Lenders examine credit scores, usually relying on the middle of three FICO scores, to determine creditworthiness. Lenders also scrutinize payment history, which provides insight as to how well a borrower manages debt, and how likely it is that the borrower will meet a new home loan obligation. The FHA promises to reimburse participating lenders, which underwrite and fund FHA loans, whenever borrowers default. Although the FHA has relatively lenient credit score standards, FHA lenders often implement their own guidelines for determining creditworthiness.
A Double Take
Shifts in credit scores and increases in monthly payment obligations can make or break a refinance or purchase deal. Because a lot can happen in 30 to 60 days -- the typical time frame for closing an FHA transaction -- lenders often check your credit again in the interim. In addition to an initial qualifying credit check, the lender may run a subsequent credit check weeks before closing or on the day it intends to release the money to fund the loan. A lender may or may not disclose a final credit check before closing, but may run the credit again under the initial credit check authorization that a borrower signed at the time of application.
Why All the Fuss?
A loan is fully approved only after the buyer signs the final loan agreement document, and the lender completes its due diligence, including any quality-control audits and last-minute credit checks. The lender, therefore, has time to back out if a borrower's financial circumstances change before funding. The expense of buying a home and the need to decorate and furnish it may lead borrowers to make hefty purchases on credit before closing. Additionally, unscrupulous investors may use deceptive means to obtain FHA financing, such as concealing newer mortgage obligations and accumulating various properties within a short time frame. A second credit check can unravel such schemes.
The FHA Lacks Tolerance for Lax Lenders
Despite reimbursement through the FHA mortgage insurance fund, lenders have a lot to lose when they make bad loans. FHA approves lenders to fund and service loans under its mortgage insurance programs. The agency can, therefore, take away a lender's FHA approval, preventing it from further participating in FHA programs and causing it to lose business. The FHA performs its own quality-control audits of lenders and may pinpoint lax lenders for removal from its approved list due to high rates of default and fraudulent loans.
- Los Angeles Times: Lenders Likely to Order Second, Last-Minute Credit Report Before Closing on a Mortgage
- New York Times: http://www.nytimes.com/2013/07/07/realestate/pre-closing-credit-checks.html?_r=0
- The Street: Fannie Nixes 'Closing Day' Credit Checks
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Karina C. Hernandez is a real estate agent in San Diego. She has covered housing and personal finance topics for multiple internet channels over the past 10 years. Karina has a B.A. in English from UCLA and has written for eHow, sfGate, the nest, Quicken, TurboTax, RE/Max, Zacks and Opposing Views.