Beginning April 1, potential borrowers with ongoing credit disputes totaling more than $1,000 will not be able to get a mortgage insured by the Federal Housing Administration.
The rule marks a significant belt-tightening at the FHA whereas the adminstration earlier held no such requirement that disputed credit accounts needed to bepaid 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.
After April 1, the borrower must either pay off the outstanding balance on these collections accounts or document a payment arrangement that the lender mustthen submit to the FHA before closing. The payment arrangement will be counted into the debt-to-income ratio for the new home loan.
Some experts expect an signifant reduction in FHA originations this year because so many borrowers in the 650 to 680 FICO score range have a past due collections account.
The rule excludes disputed accounts from more than two years ago, along with those related to theft. But the lender must document an identity theft or police report on the fraudulent charges.
An FHA spokesman said the rule was designed as another protection for the FHA emergency fund. The fund levels slipped to 0.2% of at-risk insurance last year, well below the 2% mandated by Congress. The FHA will raise insurance premiums on April 1 as well to boost the fund by $1 billion.
When performing loan-level reviews of FHA loans, it was 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 change was made to eliminate this layer of risk to FHA-insured loans and help protect our insurance fund.
The unintentional consequences could be severe for those still originating mortgages.