On April 1st, 2012, FHA has brought a "little" change in their mortgage giving criteria. This small change can create immense problems for quite a large number of homebuyers. The change in rule will affect every homebuyer who has one or more collection accounts mentioned in his/her credit report. The collection account may range from retail, medical bills, student loan etc. irrespective of whether or not they are reported correctly.
What is the new FHA rule all about?
In the new rule, the Federal Housing Administration (FHA) mentions that it will not consider loan applications for those applicants who have outstanding collections or any kind of disputed accounts with a total of $1,000 or more mentioned in their credit report. Earlier FHA allowed lenders to review the overall credit situation of the borrowers and approve applications despite such collection accounts.
As per the new FHA rule, if the collection items cross the total $1,000, then the loan applicant will have to pay off the accounts at the time of closing or before the closing. However, the new rule can be waived off on certain grounds which include:
- Disputed debts due to identity theft
- Debt incurred due to credit-card theft
- Unauthorized use of applicant's credit
- Collection accounts less than $1,000 and at least two years old
What's the reason for this policy shift?
FHA has clarified that this policy shift is a part of its efforts to reduce loan defaults as well as insurance claims. However, mortgage lenders who specialize in FHA loans are upset due to this policy shift. This new rule will make a large number of people ineligible for FHA loans.
Thus, if you're considering an application for an FHA insured loan, then you should be aware of the new FHA rule. Before you apply for an FHA loan, make sure you check your credit report from all the 3 credit bureaus. If you find outstanding collections, try to dispute them, negotiate them and pay them off or else, you may not qualify for the loan.