FHA Rule Changes

FHA New Rules Will Affect Housing Recovery

Hud just sunk a dagger in the Housing industries’ throat, just when the housing industry showed the slightest glimmer of life. Housing numbers had just started showing some life signs. The struggling effort at recovery will continue, but the wind in the sail has been buffetted.

With the April 1st, 2012 FHA Rule changes, a substantial number of borrowers will no longer qualify for a FHA loan. Since there will be a lot less qualified buyers able to buy, the number of homes for sale in the market will remain high, which will keep competition high and home prices low.

Since 2007, underwriting guidelines and changes to rules in the mortgage industry have been constant.

Last year alone there were over 250 rule changes. Real estate professionals are use to rule changes, almost to the point of boredom, believing that none will effect us, and maybe the changes are needed. But this rule change baffles me… The FHA portfolio has taken some hits, but the newer loans from the last two years are of a much higher qaulity than the earlier portfolio. It’s probable that the poor quality of previous year’s loans are the reasons for the rule changes. But it makes it no more digestable.

This is a BIGGG Change- None of the previous changes will have the negative effect on the housing industry, like the new rules and underwriting guidelines proposed to take affect April 1st 2012.

The main changes to these FHA guidelines involves how underwriting will treat “disputed” items on a credit report and how “collection” accounts will be handled.

The previous FHA rules did not require the borrower to pay collection accounts off in full prior to closing escrow on the buyer’s new home. Court order judgments however, were required to be paid in full prior to obtaining loan approval.

In short, the new FHA guidelines that may affect the buyer’s approval process for a home loan are:

Buyers need to know that if they have a collection account over $1000, they immediately must start the loan process and have a home under contract prior to April 1, 2012. Otherwise, all collection accounts would have to be paid in full.

In a conversation with HUD, we have also verified the following: – Debts owed by a non-borrowing spouse will be held to the same standard above. – HUD also confirmed that if an account is reported as “Charged Off”, yet the report stills shows a balance, the balance must be paid unless we can get the reported balance updated to reflect zero. – HUD also confirmed that if an account reports as “Repossession”, any balance reported MUST be paid off unless we can get the reported balance updated to reflect zero

Charge-offs will not count as a collection or towards the $1,000 limit.

What You Need to Know About FHA
and Disputed Accounted, Collections and Public Records (Effective 4-1-12)

FHA has published a new set of rules when it comes to borrowers who owe over $1000 on collections or disputed accounts. You’ll find new rules when it comes to public records or judgment too. It’s more important than ever to get borrower’s pre-qualified because these new rules can be a deal-breaker.

Disputed Accounts

If a disputed account(s) appears on the credit report it must meet the following:

• The total outstanding balance of all disputed credit accounts or collections (including medical accounts) are less than $1,000,and
• Disputed credit accounts or collections are aged two years from date of last activity as indicated on the most recent credit report.

Paying down disputed accounts to the $1,000 threshold to meet FHA UW is not an acceptable.

Disputed Accounts in Excess of $1,000

If the borrower has individual or multiple disputed credit accounts or collections (including medical accounts) with singular or cumulative balances equal to or greater than $1,000, the accounts must be
• resolved (e.g. payment arrangements with a minimum three months of verified payments made as agreed) or
• paid in full, prior to, or at the time of closing.

Documentation will be required to support the payment arrangements or that the debt has been paid off. The payments arranged for the accounts must be included in the calculation of the borrower’s debt-to-income ratios.

Note: Paying down disputed accounts to the $1,000 threshold is not an acceptable remedy.
What You Need to Know About FH and Disputed Accounted, Collections and Public Records (Effective 4-1-12)

Disputed credit accounts or collections from identity theft, credit card theft, or unauthorized use, etc.are excluded from the $1,000 limit when

• A credit report or letter from the creditor, or other appropriate documentation, to support that the borrower filed an identity theft or police report to dispute the fraudulent charges.
• Documentation showing that all disputed or collection accounts are resolved, verified as not a debt to the borrower, arrangements made for payment, or paid in full.

Collection Accounts in Excess of $1,000

If the TOTAL outstanding balance of all collection accounts (including medical accounts) is equal to or greater than $1,000 the borrower must

• resolve the accounts (e.g. entered into payment arrangements with minimum three months verified payments- paid as agreed) or
• paid in full at the time of, or prior to closing.
• Mortgagees must document the case binder showing each account was resolved or paid in full.

If the total outstanding balance of all collection accounts is less than $1,000, the borrower is not required to pay off the collection accounts as a condition of mortgage approval.

Note: Paying down collection accounts to the $1,000 threshold is not an acceptable remedy.

Public Records/Judgments

Judgments continue to be required to be paid off before the mortgage loan is eligible
for FHA insurance.

An exception to the payoff of a court-ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments, and provides documentation indicating that a minimum of three months payments have been made according to the agreement. The monthly payment must be included in the borrower’s debt-to-income ratio.

Medical Collections on a Credit Report

The new guideline for medical collections is the real kicker. Buyer’s beware – medical collections are now

included, where they were omitted in the previous guidelines.

Please call me with your questions and to pre-qualify your FHA clients BEFORE You even start showing them homes! 281-348-9899 FHA Rule Changes

FHA Rule Changes

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