If you have finally straightened your credit history out and are ready to apply for an FHA loan, your hard work is not over yet. Any lender, whether it is for FHA financing or another type of financing, will not just look at your credit score; they will look at your credit history as well.
In some cases, the lender will just go back 12 months but, in most cases, 24 months is more likely. This means that any negative history that you have will be discussed and will likely need explanations in order for the lender to approve you.
Your Credit History Says a Lot About You
Your credit history, not your score, says a lot about how you handle yourself financially. If you have a large number of accounts that are delinquent in the last 24 months, yet have been brought current, you might show a pattern of financial irresponsibility. This is what the lender wants to see. If they see a pattern, they may not even ask about the delinquencies in your credit report; they may just deny you for the loan. This is not the case for every lender, though, as the FHA gives lenders leeway in what additional restrictions they can add to their loan requirements. If a lender is willing to discuss your negative credit history with you, it pays to have a plausible explanation ready for them. Most lenders will also require that you put the explanation in writing in what is called a Letter of Explanation.
Showing a Positive Change in Credit History
The most important thing you can do is show how you changed for the better. For example, say that you have several late revolving debt payments in the last 24 months, but have since brought them current and have had no late payments in the last 12 months on those accounts.
The lender will want to know why you had those late payments. What caused you to make not just one, but several payments late? Did you lose your job? Were you injured/sick and unable to work? Or did you overextend yourself financially and were unable to make ends meet? Obviously, the lender wants to hear things like you lost your job unexpectedly or you were injured and that you turned things around after that, but this is not always the case.
You have to be able to provide adequate proof of the statements you make. Sometimes a Letter of Explanation is enough, but certain lenders want proof. For example, if you say that you were laid off for 6 months, you need to prove that your income declined during the time period you state you were laid off.
Most lenders want to see a decrease in income of at least 20 percent in order to accept the excuse that you were laid off and unable to pay your bills. They also want to see proof that you brought your income back up and have been able to make ends meet since then. You can prove all of these things with paystubs, W-2s and 1040s from that time period.
The most important thing you can do is be prepared when you apply for an FHA loan. If you cannot remember what type of late payments you experienced in the last 24 months, it is a good idea to get a copy of your credit report so you know what the lender sees. This will make you able to be more prepared for the questions the lender is about to throw at you. Chances are, that you are going to have to dig through paperwork or order statements in order to prove that you have overcome the bad financial issues that occurred, so being prepared will help you have the best chance at getting approved on your FHA loan with the first lender that you try.