Indicators of Unacceptable Credit
In recent years, families have gone through tough economic times affecting their ability to meet financial obligations. As a result, so many of the questions we get relate to what lenders in the USDA program will allow with respect to late payments, past-due balances, bankruptcies, foreclosures, etc. Therefore, we dedicate this space to those topics.
The applicant of a USDA loan must have a credit history that indicates a reasonable ability and willingness to meet obligations as they become due. The following are indicators of an unacceptable credit history.
The Lender may consider mitigating circumstances to establish the borrower's intent for good credit when the applicant provides the circumstances were of a temporary nature, were beyond the applicant's control, and have been removed. In such cases, the lender must approve a credit waiver and document the factors considered in support of the underwriting decision.
The applicant of a USDA loan must have a credit history that indicates a reasonable ability and willingness to meet obligations as they become due. The following are indicators of an unacceptable credit history.
The Lender may consider mitigating circumstances to establish the borrower's intent for good credit when the applicant provides the circumstances were of a temporary nature, were beyond the applicant's control, and have been removed. In such cases, the lender must approve a credit waiver and document the factors considered in support of the underwriting decision.
1. Late Payments
"Incidents of more than one debt payments being more than 30 days late if the incidents have occurred within the last 12 months. This includes more than one late payment on a single account."
Note: It the late payments appear to be part of a pattern that began in the past and continues into the present, the lender is likely to conclude the applicant has not yet ready to meet the mortgage obligation. On the other hand, if the applicant has had a good credit history yet has some late payments in the past 12 months that are out of character, it may simply be a matter of getting documentation of the mitigating circumstances allowing the lender to approve a credit waiver.
Note: It the late payments appear to be part of a pattern that began in the past and continues into the present, the lender is likely to conclude the applicant has not yet ready to meet the mortgage obligation. On the other hand, if the applicant has had a good credit history yet has some late payments in the past 12 months that are out of character, it may simply be a matter of getting documentation of the mitigating circumstances allowing the lender to approve a credit waiver.
2. Late Rent Payments
"Two or more rent payments paid 30 days or more past due within the last 3 years."
Note: Late payments on a housing obligation is of particular concern to lenders. However, as with other late payments, the lender will consider the entire credit history and consider any mitigating circumstances.
Note: Late payments on a housing obligation is of particular concern to lenders. However, as with other late payments, the lender will consider the entire credit history and consider any mitigating circumstances.
3. Accounts Converted to Collections
"Accounts which have been converted to collections within the last 12 months (utility bills, hospital bills, etc.)."
Note: Accounts converting to collection in the the past 12 months perhaps indicates the applicant is struggling to pay accounts or has a disregard for past financial obligations. The lender must consider the entire credit history to determine if the converted accounts are out of character or part of a pattern of adverse credit.
Note: Accounts converting to collection in the the past 12 months perhaps indicates the applicant is struggling to pay accounts or has a disregard for past financial obligations. The lender must consider the entire credit history to determine if the converted accounts are out of character or part of a pattern of adverse credit.
4. Unpaid Collections
"Collection accounts outstanding, with no satisfactory arrangements for payments, no matter what their age as long as they are currently delinquent and/or due and payable."
Note: Allowing a collection to remain outstanding collection and paying at the time of the mortgage application is not justification, in itself, that would establish an applicant has demonstrated a willingness to meet obligations in an acceptable manner. Nevertheless, it is entirely the lender's decision to issue an adverse credit waiver and decide if open collection accounts should be paid in full prior to or at closing by considering the collection type, age, and its potential to negatively affect clear title to the subject property.
Note: Allowing a collection to remain outstanding collection and paying at the time of the mortgage application is not justification, in itself, that would establish an applicant has demonstrated a willingness to meet obligations in an acceptable manner. Nevertheless, it is entirely the lender's decision to issue an adverse credit waiver and decide if open collection accounts should be paid in full prior to or at closing by considering the collection type, age, and its potential to negatively affect clear title to the subject property.
5. Outstanding Tax Liens and Government Debts
"Outstanding tax liens or delinquent Government debts with no satisfactory arrangements for payments, no matter what their age as long as they are currently delinquent and/or dueand payable."
Note: As a general rule tax liens and court-created or affirmed judgements must be paid and release prior to closing since they usually negatively affect clear title to the subject property. The notes on unpaid collections above apply also to outstanding tax liens and government debts.
Note: As a general rule tax liens and court-created or affirmed judgements must be paid and release prior to closing since they usually negatively affect clear title to the subject property. The notes on unpaid collections above apply also to outstanding tax liens and government debts.
6. Legal Judgements
"A court-created or affirmed obligation (judgment) caused by nonpayment that is currently outstanding or has been outstanding within the last 12 months."
Note: As a general rule tax liens and court-created or affirmed judgements must be paid and release prior to closing since they usually negatively affect clear title to the subject property. The notes on unpaid collections above apply also to legal judgements.
Note: As a general rule tax liens and court-created or affirmed judgements must be paid and release prior to closing since they usually negatively affect clear title to the subject property. The notes on unpaid collections above apply also to legal judgements.
7. Loss of Security
"Loss of security due to a foreclosure if the foreclosure has occurred within the last 36 months."
Note: This guideline has been expanded by USDA to now include pre-foreclosure activity in the previous 36 months.
Note: This guideline has been expanded by USDA to now include pre-foreclosure activity in the previous 36 months.
8. Debts Written off
"Any debts written off within the last 36 months."
Note: This guideline applies to Chapter 7 bankruptcy and short sale agreements.
Note: This guideline applies to Chapter 7 bankruptcy and short sale agreements.
10. Debt Restructuring Plans
"A Chapter 13 in progress."
Note: A Chapter 13 bankruptcy does not disqualify an applicant so long as 12 months of the repayment period have elapsed under the plan, all payments have been paid on time, and the applicant has received written permission from the bankruptcy court or trustee to enter into a mortgage transaction.
Likewise applicants participating in a consumer counseling payment plan are not disqualified an applicant so long as 12 months of the repayment period have elapsed under the plan, all payments have been paid on time, and the applicant has received written permission from the counseling agency to enter into a mortgage transaction
Note: A Chapter 13 bankruptcy does not disqualify an applicant so long as 12 months of the repayment period have elapsed under the plan, all payments have been paid on time, and the applicant has received written permission from the bankruptcy court or trustee to enter into a mortgage transaction.
Likewise applicants participating in a consumer counseling payment plan are not disqualified an applicant so long as 12 months of the repayment period have elapsed under the plan, all payments have been paid on time, and the applicant has received written permission from the counseling agency to enter into a mortgage transaction