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FHA Can Save The Day

Mar 14, 2008
I own several web sites that teach mortgage underwriting guidelines and allow for consumers and mortgage professionals to ask any questions they may have. I received this question from Donald in Toledo, OH., Sunday morning.

"What would happen if someone else used my social security number for a utility bill and I never lived at that address? This happened about five years ago when I found out about it. Will this hurt the underwriting of the house I am trying to buy"?

In conversation I found out that this "utility bill" later turned into a collection. Donald is fortunate that it is five years old. I also learned that his credit scores are: 615, 625, and 652.

This was my answer:

Donalds problems began when with the unauthorized use of his social security number and his failure to correct his records at that time with Equifax, Trans Union, and Experian. These companies have great web sites now that teach consumers about their reports and scores. In fact, you can actually file your dispute about incorrect information in your report from their web site.

The Government mandated a few years ago that every person be entitled to one free credit report each year, from each bureau. This is a wonderful thing because years ago you were not allowed to even look at your report. You were really up that well known creek and just guess who had the paddles. Get your report once a year from each company and take the time to review it. There is only one web site you can get these reports from and that is annualcreditreport.com.

Mortgage underwriting in todays market is most often done on an automated system. This small collection that is 5 years old should not prevent the loan from being approved but Donald will have to provide an explanation and documentation. He may even have to pay it off even though it is not his. It depends on the type of loan he is applying for.

In this particular case the credit scores are not really bad but they are not really good either. In fact, they are a little low compared to the average. This is a great example as to why you should monitor your credit every year. Don't wait till you are applying for a loan.

I don't have a clue what Donald's employment history is or what his debt to income ratio is or how much he is putting down. These factors all play a part in loan approval and could be considered compensating factors if all three are very strong.

With the information I have, I would think that a conventional loan with a high loan to value (small down payment) would be difficult and the interest rate, if it were approved, would reflect the low scores. I would recommend an FHA loan. The interest rates are very low and FHA doesn't require a large down payment. This assumes the other factors are in line.

FHA mortgages are very forgiving about credit, down payment, and they have some of the best interest rates on the market. I should say something about the interest rate. At this time the par rate is equal to or lower than a conventional loan (depending on the lender). If the company you are working with is charging you a much higher interest rate they may be taking advantage of your situation. They are hoping you don't know any better. Please, you must shop for interest rates.
About the Author
Connie Sanders built Mortgage Underwriters, a site teaching conventional underwriting guideline to the consumer and professional in May of 2002. Connie just completed http://www.fha-mortgageunderwriters.com to support the rising market for FHA mortgages. Visit her sites today.
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