FHA Enacts Tougher Lending Rules for Those Involved in Small Credit Disputes

The Federal Housing Administration has enacted stricter rules when it comes to borrowing money to buy a home.

As of April 1st, borrowers in ongoing disputes with creditors over debts as low as $1,000 may no longer qualify for FHA-insured loans. Even if a borrower has a perfect credit score they can be denied over a single $1,000 dispute with a creditor.

Before the rule change, lenders decided whether debt disputes were grounds for denial. An individual could be fighting a charge, say a hospital bill, and your lender could still decide that your credit history merited an approval. Now, lenders will have to justify the approval to the FHA and back its decision with documentation.

The agency is trying to make an effort to reduce its risk as it struggles with a depleted reserve fund that has dropped below legally-mandated levels. The FHA insures mortgages that originate with private lenders and has also decided to raise the premiums it charges borrowers.

The requirements are for the homebuyer’s own good, said Tiffany Thomas Smith, deputy press secretary for the U.S. Department of Housing and Urban Development, FHA’s parent agency.

“It’s a way of protecting consumers from getting into loans they ultimately can’t afford,” she said.

The new rule requires borrowers with loans in collection that add up to at least $1,000 to either pay off the debt, prove they’re making payments on it or explain why the disputed loan is wrong  and document their case before they can close on a FHA loan.’

Disputes going back more than two years, along with those related to fraud or identity theft, will not count against borrowers but lenders must get evidence, such as police reports, that document client claims of identity thefts or fraud charges.

Lenders that are underwriting FHA loans will get final say on whether the loans are approved but will run the risk of FHA rejecting it.

“Any error made is going to be on the side of caution,” he said. “Few lenders will approve the loan. They don’t want to hold a 96.5% mortgage held on their own books if the FHA rejects it.

Some experts say these new restrictions will slow the housing market recovery because fewer borrowers will be able to secure FHA mortgages.

The loans are one of the few products available for homebuyers needing low down payment mortgages at competitive terms. Most FHA borrowers put down only about 3.5% of the purchase price.

Since the housing collapse, FHA loans have at times exceeded 20% of all purchase loans and is still running at about 15%.




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