FHA rule change will hinder some
WASHINGTON — A mortgage rule change that took effect April 1 could create hassles for home buyers who plan to use low down-payment FHA financing this spring. The change affects anyone with "collection" accounts in national credit bureau files. These include medical, student loan, retail and other debts reported as unpaid — correctly or incorrectly — by creditors and subsequently sent to collection agencies.
In a reversal of its previous policy, the Federal Housing Administration says it will no longer approve applications where the borrowers have outstanding collections or disputed accounts with an aggregate of $1,000 or more of unpaid bills. Previously the agency took a more lenient approach, allowing lenders to review borrowers' overall credit situation and approve applications despite the presence of such accounts.
Under its new rule, when collection items total $1,000 or more, the accounts will need to be paid off over a period of several months or be paid in full at or before the closing. In cases where the collections or disputed debts are attributable to unauthorized use of the applicant's credit — or when collection accounts total less than $1,000 and are at least two years old — the new rule may be waived. Borrowers who have encountered "life events" such as death, divorce or loss of a job may also provide documentation to support a waiver, according to a policy clarification issued by the agency.
The policy shift, which the agency says is part of ongoing efforts to reduce loan defaults and insurance claims, has upset some mortgage lenders who specialize in FHA business. Clem Ziroli Jr., president of First Mortgage Corp. in Covina, Calif., estimates that under the new standard "35 percent of borrowers who've obtained FHA financing historically (would be) ineligible." He complained in an email that "FHA's mission has always been to serve low- to moderate-income borrowers" — a population segment where the presence of one or more collections on a credit report is not unusual.
Brad Yzermans, a loan officer with First Priority Financial Inc. in Temecula, Calif., said he's already had to short-circuit the applications of three buyers who have open collections in their files but previously would have breezed through underwriting for an FHA loan. Worse, he added, there are buyers who are now somewhere in the pre-closing pipeline whose case files weren't assigned numbers at FHA by the April 1 deadline. Those people may now be forced to postpone their plans — or even lose the house they wanted to purchase.
So, order your credit reports from all three bureaus — Equifax, Experian and Trans-Union — or get them free at the jointly run online site, www.annualcreditreport.com. If you find outstanding collections that exceed $1,000, make them disappear if you want to zip through the FHA underwriting minefield.