Real Estate Market
FHA back pedals on credit dispute underwriting rule, perhaps only
by Broderick Perkins
(7/5/2012) The Federal Housing Administration recently offered some good news for
those applying for a mortgage and also face certain credit disputes.
The agency recently rescinded a rule that could have caused lenders to
slow or reject FHA mortgage applications, if the borrower had a credit
dispute on their credit report.
However, if you have an ongoing credit dispute and plan to get an FHA
mortgage, get rid of any credit dispute as soon as possible. The rule could
return as the FHA continues to seek ways to cut its growing
"Miscellaneous Underwriting Issues- Rescission of Disputed
Accounts and Collection Accounts Guidance (Mortgagee Letter 2012-3)"
canceled the maligned rule slated to go into effect July 1.
had planned to reject home loan purchase applications if the applicant had
an ongoing credit dispute or collections action amounting to at least $1,000
on his or her credit report.
Mortgage applicants would have had to either pay off the outstanding
balance of the disputed account or document a payment plan the lender would
have submitted to the FHA before the deal closed.
The new rule would have forbidden borrowers to pay down a
disputed amount to below $1,000 to skirt the rule.
Any payments arranged would have been included in the calculations of a
borrowers debt-to-income ratios.
The National Association of Homebuilders (NAHB) and others
lobbied heavily against the proposed rule which would have restricted the
flow of mortgage money and blocked otherwise creditworthy borrowers from
qualifying for an FHA-insured loan.
John Burns Real Estate Consulting reported, based on input from
homebuilders, the new rule could have disqualified 60 to 84 percent of
buyers already under contract at some new home communities.
The rescinded rule may not be permanent. The FHA plans to issue new
guidance on the topic in the near future.
The FHA has been making it tougher to
buy a home with an FHA mortgage.
Along with stiffer underwriting rules, changes are also costing borrowers
more in mortgage insurance premiums so the agency can raise millions and
offset losses to its insurance fund. Congress mandated that the fund keep 2
percent of its portfolio in reserve. Last year, the level slipped to only a
little more than 0.2 percent.
FHA insures low-down payment home loans that cover as much as 96.5
percent of a home's value. FHA loans virtually replaced toxic subprime loans
which became popular as the market peaked.
Unfortunately, subprime loan teaser starter rates, loose payment options
and low- to no-down payment deals eventually become too expensive for many
borrowers who defaulted on their mortgages under the weight of ballooning
FHA loans have been suffering the same fate and could require a taxpayer
bailout as large as $50 billion, according to a recent George Washington
University's study, "The
Role of the Federal Housing Administration in a Recovering U.S. Housing
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