Why the FHA backed off on credit disputes

by admin
July 23rd, 2012

The Federal Housing Administration (FHA) announced in June that it will abandon the requirement that applicants must settle their credit disputes before receiving an FHA-insured loan — a rule that had sparked protests from lenders, builders and real estate agents since it appeared in April.

As originally written, the rule required borrowers to pay off any credit dispute of $1,000 or more or document a payment arrangement. That payment arrangement was to become part of the borrower’s debt-to-income ratio.

After quickly revising the rule to exempt people with credit issues outside of their control, the <a href=”../2012/04/fha-delays-requirement-for-resolving-collection-accounts/”>FHA delayed the rule</a> in its entirety a week after imposing it, inviting lenders and other housing industry members to comment on the restriction. On June 15, the rule was formally rescinded, although the FHA says they will still take comments on the original proposal.

<strong>The FHA and credit disputes</strong>

The FHA has been tweaking <a href=”../fha-guidelines/”>its guidelines</a> for more than a year in order to compensate for the rising delinquencies that have sapped its reserve fund. Among the changes have been an increase in mortgage insurance premiums and a new rule that requires borrowers with a credit score of 580 or less to make a down payment of at least 10 percent.

Congress mandates that the insurance premiums the agency collects must be kept in a reserve fund that the FHA uses to pay lenders if a borrower defaults on an FHA-insured loan. The tightened credit standards and higher premiums were intended to reduce the number of defaults on FHA-insured loans and to increase the size of the reserve fund, reducing the chances that the agency would require a taxpayer bailout.

Lenders and home-builders, particularly those who work often with first-time home-buyers, fought the FHA rule on credit disputes when it came out because of concerns that too many borrowers would be unable to qualify for an FHA loan under the new rule.

They complained that consumers with credit issues are less likely to qualify for conventional financing, particularly if they have less than 20 percent for a down payment. In that case, the borrowers must pay private mortgage insurance and meet the requirements of mortgage insurance companies, which tend to be even stricter than conventional lending standards.

So for many consumers with credit issues, the new FHA restriction may have closed their most accessible route to home ownership.

<strong>Gone for good?</strong>

If you are considering an FHA loan and have any ongoing credit disputes, you may want to apply for your loan soon in case the rules change again. Or better yet, you could resolve your credit disputes before applying for a mortgage, placing you out-of-reach in case the FHA imposes a similar rule in the future — a possibility the agency has not ruled out.

Michele Lerner

Michele Lerner, author of “HOMEBUYING: Tough Times, First Time, Any Time”, has been writing about personal finance and real estate for more than two decades for a variety of publications and websites including Investopedia, Insurance.com, HSH.com, SavingsAccount.com, National Real Estate Investor magazine, The Washington Times, Urban Land magazine, NAREIT’s REIT magazine and numerous Realtor associations.

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