FHA Announced a BIG Change that will take place this summer. According to the FHA Mortgagee Letter 2012-3, beginning July 1, borrowers with ongoing credit disputes totaling more than $1,000 will have trouble getting an FHA Mortgage loan. (This date has been revised and HUD is seeking comments on the ruling)
This is a HUGE change, because for the last 20 plus years, you could pretty easily get an FHA mortgage, without paying off medical collections. Now, even if you have 740 credit scores – if your total disputed accounts add up to $1000 or more… all collections and disputed accounts will need to show payment arrangements, and on time payments for these accounts must be documented for at least 3 months.
The rule marks a significant belt-tightening of the FHA guidelines. Before this rule, our Bank Underwriter could determine if any of the borrower’s outstanding debts should impact the approval of the FHA-backed mortgage. One New Home Builder estimated that this could affect as much as 65% of the buyers in their community.
It is unclear what documentation the FHA Underwriters will accept to show that the account is being paid as agreed. Meaning that, some underwriters might want the payments to show on the credit report (not accepting cancelled checks) and others might want an additional statement from the collection agency, or an updated credit report. FHA gives guidance on all 3 ways to verify the accounts, but each Bank will likely create their own Underwriting Guidelines for this new ruling. (See Page 3 Mortgagee Letter 2012-3)
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. The inherent problem with this “dispute” date, of course, is that collection debt is so often sold – and the credit report most often does NOT reflect the correct date that the dispute began.
“When performing loan-level reviews of FHA loans, 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 FHA spokesman said. “This change was made to eliminate this layer of risk to FHA-insured loans and help protect our insurance fund.”
Paying “down” of balances on disputed accounts and collections to reduce the singular or cumulative balance to below $1,000, is not an acceptable resolution of accounts.
Want to buy a house but you have some outstanding collections? Better get working on that NOW! Call Steve Thorne 919 649 5058 for more information about qualifying for a FHA loan in Cary or buying a home in Raleigh when you don’t have a full 5% (plus 3 months of payments) in reserves! We do a TON of USDA Home Loans and our Bank works with NC Housing, so you might qualify for down payment assistance!