FNMA Guidelines:

A borrower's credit history should demonstrate both a willingness and the ability to meet credit obligations including the new mortgage being considered. A borrower's overall pattern of making payments is considered more important than a few individual negative occurrences. For example, a borrower's credit history may reflect an occasional late payment that is not necessarily attributable to his or her disregard for the obligation.  Other factors to be considered include disputes, differing report or rating methods, slow mail, etc. that may have resulted in the reporting of the delinquent payments.

FNMA does not require that the credit record be spotless and the borrower should not be penalized for an occasional late payment if he or she has an otherwise good payment history. The age of any account that reflects late payments must however be evaluated including the frequency and severity of the delinquent payments, the account balance, when the late payment(s) occurred, and the status of the borrower's other credit accounts.

Although the lender will review a borrower's 7-year credit history for undisclosed  or derogatory credit (judgments, liens, bankruptcies, etc.), the past 24 months is considered most important in ascertaining whether the borrower has sufficient credit  (without adverse ratings) to grant loan approval. Generally, the lender will consider a borrower's credit history acceptable if the borrower has had no more than 2 revolving and 1 installment loan past due notices over the last 12 months and no material derogatory credit has been reported over the past seven years.  

If a consistent pattern of slow payments, undisclosed debts, judgments for non-payment of obligations, bankruptcies, etc, is evident, these items must be thoroughly investigated by the lender.  In many cases, a written explanation from the borrower and added to the credit report file may be adequate.   If, on the other hand,  severe derogatory credit cannot be explained and there are no extenuating circumstances, there must be strong offsetting considerations in order for the lender to favorably consider the loan request. 

NON-CONFORMING LOANS

If your credit history is unacceptable, the best advice offered is to work on creating a positive credit record over the next 1 to 2 years by bringing all debt payments current. You may also make a larger down payment and/or obtain a loan with a higher interest rate. By keeping the new account current, you should be able to reestablish your credit record and even refinance to a lower-rate loan if all mortgage payments are made on time and other debts are kept current.