You have collections on your credit report so you automatically assume you will not be eligible for an FHA loan. After all, collections make your credit score drop and they look bad on your credit history. While both of those statements are true, they do not prevent you from getting a loan from the FHA under certain circumstances. Just like everything else, the FHA requires explanations, if your explanations are worthy enough for the lender to not determine your loan risky, you may still be eligible. So what excuses really work? Here’s a few.
Sometimes job loss occurs out of no doing of our own. If you were part of a downsizing or you lost your job due to a company closing and your credit suffered as a result, it is easy enough to prove to the lender. You can show the lender your decrease in income during the period that you were out of a job and that the dates coincide with the dates of the collections on your credit report. If you can also prove that your income has since increased and you have not had any subsequent issues in regards to your credit and any collection accounts, then the one-time occurrence might be able to be overlooked and you could be considered a good risk.
Illness or Injury
Just as job loss can sometimes occur without any wrongdoing on your part, so can a sudden injury or illness. If the injury or illness was serious enough that you were in the hospital and/or unable to work for a period of time, you might be able to work around those collections that occurred as a result of this occurrence. Sometimes, you are able to still get compensation from your job, especially if you were hurt on the job, so be careful with your reasoning so that you do not get caught up in a lie. The injury/illness and collections need to be directly related and able to be proven with adequate evidence in order for it to be accepted for an FHA loan. If you have the proper proof, though, the collections may be overlooked by some lenders.
Other Extenuating Circumstances
Since extenuating circumstances are personal, there are hundreds of reasons you may be able to give the lender to explain your collections. What they do not want to see/hear is that you just disregarded your financial responsibility or you just overlooked the debts without adequate reason. You need to have a solid reason that beyond a reasonable doubt was not avoidable. It has to be circumstances that would have occurred no matter what you tried and cannot have anything to do with your inability to manage your own finances. If your income never changed but you experienced collections on your credit report, it will be hard to prove that you had any type of extenuating circumstances.
Remember, if you have any circumstances that caused your collections, not every lender will accept the excuse. This does not mean you cannot get an FHA loan at all; it just means you have to shop around. In addition to FHA’s guidelines are the guidelines that each lender creates as they are the ones funding the loan so it is their money that is at risk. Even though the loan is guaranteed by the FHA, lenders are still careful about who they lend to in order to minimize their risk. No one wants to make a claim against the FHA – it is the bank’s goal to only give out “good” loans or loans that will not default.