No Mortgage Backing by FHA If Credit Disputes Total Over $1,000
Borrowers now need to resolve even minor disputes with their creditors before expecting the Federal Housing Administration to insure their loan. As of April 1, the FHA will no longer consider insuring a mortgage to any potential borrower with ongoing credit disputes totaling more than $1,000.
Prior to the new rule, individual underwriters and lenders could determine whether a borrower’s outstanding debts and credit disputes should affect the approval of an FHA-backed mortgage. But as the FHA continues to look for ways to reduce its risk and protect the slipping levels in its reserve fund, mortgage seekers need to keep up with the stricter requirements. Starting in April, lenders need to justify each approval to the FHA and provide documentation that backs their decision.
Borrowers with debts of at least $1,000 in collections now have two options: pay off the outstanding balance or resolve the issue with a valid explanation before closing. The FHA will want to see either proof of a payment arrangement with the creditor(s) or evidence that the disputed loans are being collected as an error.
The new rule does not apply to disputed accounts that date back more than two years or to those related to fraud or identity theft, providing the client can show documentation, such as police reports, of the identity theft case or fraudulent charges. While a lender can still decide to issue the loan to a borrower who supplies sufficient information that sides in their favor, the FHA may still reject it, making this an unlikely scenario as lenders will match their caution to the new FHA rules.
Also beginning in April, the FHA has raised its insurance premiums from 1% to 1.75% of the base loan amount. Some fear the combination of these two new changes could keep the housing market in its lull, if fewer buyers can qualify for FHA mortgages. About 15% of all mortgages are insured by the FHA, which insures mortgages that originate with private FHA-approved lenders. The percentage was significantly higher in 2009 and 2010, as the loans have been a popular option for clients with less-than-perfect credit who seek a low down payment and affordable terms.