The Federal Housing Administration announced that starting April 1 it will not insure mortgages to borrowers who have an ongoing credit dispute of $1,000 or more on their file.
To be considered for an FHA-backed loan, borrowers will either have to pay the remaining balance on the credit dispute or enter into a payment plan, making at least three payments on it. Any payment plans will need to be documented and submitted to FHA, which will then figure it into the debt-to-income ratio for the new mortgage. FHA’s new rule does not include disputed credit accounts from more than two years ago or any related to reported identity theft.
This rule change is having an adverse effect on many people. Often accounts that have no reason to be on the credit report are reported by collection agencies as an outstanding debt. Legitimate disputes over the validity of these reported accounts exists, however, the creditor only needs to report the debt as disputed by the consumer. With the new guidelines, disputed accounts are taken into consideration if less than two years old. Bottom line is that consumers should aggressively monitor and correct their credit reports.
Still, the new rule has some in the housing industry worried that it’s going to keep more potential home buyers from securing a mortgage. “We expect this revision will certainly kick some buyers out of the marketplace, and we’re in ongoing efforts to quantify how extreme the impact will be,” Lisa Jackson, senior vice president of research at John Burns Real Estate Consulting, told HousingWire.
Jeremy Radack, a real estate attorney in Houston who assists with financing, estimated FHA originations may be reduced by 33 percent to 50 percent this year due to the new rule. FHA says the rule is aimed at protecting the FHA’s emergency fund, which has fallen below the mandated amount Congress requires.
“We found that many borrowers with mortgage payment delinquencies had prior credit deficiencies including unpaid collections and unresolved disputed accounts prior to the approval of their loan,” the spokesman said. “This change was made to eliminate this layer of risk to FHA-insured loans and help protect our insurance fund.”
Also in reimbursing the emergency fund*, FHA announced it would raise its insurance premiums starting April 1 too.
Source: “FHA to Deny Mortgage Backing for Credit Disputes Above $1,000,” HousingWire (March 26, 2012) and “Tougher Requirements Start Monday for FHA Mortgages,” Tampa Bay Times (March 27, 2012)