FHA delays requirement for resolving collection accounts

by Karen Lawson
April 18th, 2012

The FHA has delayed requiring prospective borrowers to either pay off or make a minimum of three payments on their accounts referred for collection. The decision to delay this requirement’s effective date until July 1 came after FHA-approved mortgage lenders complained that the new rule would result in many potential FHA borrowers being disqualified.

Columnist Kathleen Pender wrote recently in the San Francisco Chronicle that approving FHA mortgage loans for borrowers who have outstanding debts in collection could increase taxpayer risk if these loans default and FHA doesn’t have enough in its reserve fund for reimbursing lenders’ losses. On the surface this makes sense, but several factors beyond would-be borrowers’ control can contribute to unpaid collection accounts:

  • No or limited health insurance coverage: With hospitals billing at thousands of dollars per day, uninsured patients can easily accumulate insurmountable debt.
  • Long periods of unemployment/underemployment: The economic downturn is causing many people with formerly spotless credit histories to default on their debts.
  • Failure of creditors to remove derogatory credit information from credit reports: Creditors may fail to remove debts discharged through bankruptcy or those repaid long after the original default.

If you’re considering an FHA loan, review your credit reports before applying and address incorrect information through the three credit reporting bureaus. If you have unpaid debts due to a hardship, such as a long-term illness, serious injury or unemployment, the FHA has reportedly indicated that it may be willing to waive the coming debt requirements if the hardship is well documented.

There is a difference between someone who charges a luxury vacation and doesn’t pay their credit card bill and a person who suffers a serious injury or illness while uninsured, unemployed or both. So if you’ve faced a situation in which a hardship led you into debt, be sure to make this distinction to your potential lender before you apply for an FHA loan.

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