FHA Eases Credit Rules for Some Borrowers

October 20, 2013

Mortgage applicants who have certain credit report issues may now be eligible for FHA home financing, thanks to recent changes in the agency’s policies.

The Federal Housing Administration (FHA) has eased previous rules that would have led to many application rejections, a recent Inman.com article reports. Apparently, the FHA issued two mortgage letters explaining its new approach to credit problems that may affect borrowers’ abilities to get approved for a mortgage. One of the letters, ML 2013-24, will replace the controversial credit regulations regarding handling of collections and disputed accounts.

Promoting Affordable Credit

The earlier guidance, released in 2012, required payoffs of collections or disputed accounts totaling an aggregate of $1,000 or more before applicants could close on an FHA loan. Many people considered this rule overly stringent, particularly lenders and community groups concerned with homeownership. After intense criticism, the FHA withdrew the rule in June 2012. The FHA promised to develop a new policy that would offer a “balanced yet flexible approach to promote access to affordable credit while protecting the insurance fund.”

Those who criticized the rule cited the fact that many consumers have disputed accounts on their credit reports that were not caused by the consumers themselves. Additionally, critics argued that many consumers had legitimate reasons for not paying the account in full. Extenuating circumstances, for example, often lead to unpaid bills or disputed charges.

The critics of the earlier rule believed that consumers who displayed otherwise good financial habits, shouldn’t be punished for credit hits that were of no fault of their own. As a more specific example, medical bills are often the cause of disputed accounts. In many cases, the bills are disputed because the services performed greatly exceeded the estimated costs. Sometimes these bills are “sold-off” to collections agencies, which can leave a long-lasting mark on a consumer’s credit report, even if the consumer had a perfectly legitimate reason for refusing to pay.

The new disputed accounts rule, which went into effect October 15, exclude all consideration of medical collection and charge-off accounts and “do not require resolution” for applicants to get approved. The new rule also requires the lender to document reasons for approving the loan when the applicant has a collection account in any amount. However, if the total exceeds $2,000, the lender must complete a “capacity analysis” which is designed to help the lender determine whether the borrower can handle any periodic payments that may be required to satisfy the debt. This can also help the consumer develop a repayment strategy, if needed.

Unlike the earlier rule, the new guidance will treat derogatory disputed accounts separately. If the aggregate amount of disputed items on the consumer’s credit report is equal to or greater than $1,000, the lender must manually underwrite the application. As mentioned earlier, medical disputes are excluded from the $1,000 limit. Disputed accounts that are the result of identity theft or credit card theft are also excluded.

The second set of rules (ML 2013-26) issued by the FHA sets the guidelines for how the agency approaches “extenuating circumstances” that may have caused dramatic drops in the consumer’s credit rating. These new rules state that the “FHA recognizes the hardships faced by…borrowers (hit by recession events) and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage.” For example, if you lost your job due to the fact that your company suffered severe setbacks during the recession, you may still be able to get approved for an FHA loan – even if your previous home was foreclosed.

[Related Post: Changes to FICO Policy May Help Boost Homeownership]

Economic Events

Under standard FHA guidelines, individuals who filed a foreclosure are usually not eligible for a loan for up to three years. But under the new rules, the individual may not have to wait, as long as they can prove they suffered an “economic event.” An economic event is defined by the FHA as “any occurrence beyond the borrower’s control that results in loss of employment, loss of income or both” that causes a 20 percent decline in household income for at least six months.

If the individual can provide evidence of having experienced such an event, he or she may be eligible for FHA home financing in as little as one year, as opposed to three.

To learn more about FHA loans, or to get a free rate quote and eligibility consultation, connect with eLEND today. Simply call (800) 634-8616 or submit your information via the Request Mortgage Rate form on this page.

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