The Federal Housing Administration (FHA) has established a rule that prevent those seeking an FHA insured loan from getting a mortgage if they are dealing with a credit dispute of $1,000 or more. The rule took effect on April 1.
Now buyers will have to either pay-off the outstanding credit issue or enter into a payment plan and make at least 3 payments on that plan. This payment plan will then subsequently need to be included in a buyer’s debt-to-income ratio when applying for an FHA insured loan.
According to Housewire.com:
“The rule marks a significant belt-tightening at the FHA whereas the administration earlier held no such requirement that disputed credit accounts needed to be paid off. Before this rule, a direct endorsement underwriter could determine if any of the borrower’s outstanding debts should impact the approval of the FHA-backed mortgage.”
The Tampa Bay Times reported that the new rule does not apply to disputes two years old or older or to cases of identity theft.
“Credit accounts more than 2 years old or those related to identity theft will not be factored into the new rule. The lender, however, must document the fraudulent charge with a police report. If the outstanding balance of all collection accounts is less than $1,000, borrowers are not required to pay off the debts to get mortgage approval, the FHA says.”
Some mortgage officers believe that the new rule will adversely affect a home buyer’s credit score and the interest rate for which they qualify, and subsequently, disqualify many home buyers. Others have stated it is a good rule that fails to address the reality of credit issues.
“It’s going to potentially damage credit scores,” Leticia Ramos, loan officer for Guild Mortgage in Dallas Texas, told the Dallas Morning News. “Once you reopen an old collection, it’s going to drop the borrower’s credit score and it’s going to affect that borrower’s purchase and it could hurt their interest rate as well.”
Mortgage banker Craig Jarrell told the same newspaper that he supports the rule, but indicated the new rule does not address the reality of some credit issues:
“It is easy to make the rule with good intentions, and people should clean up their credit before they buy a house. But many times these unpaid accounts are small, hard to verify, hard to prove, hard to locate, and hard to pay the correct party to get them removed.”
Specializing in western Mass real estate, call Michael Seward at 413-531-7129 if you are looking to buy or sell a home in western Massachusetts and would like information about local lenders who can help you with an FHA loan.