by Amy Lillard
(4/2/2012) A new FHA rule beginning in April may seem small in scope and even smart in idea. But analysts contend the new rule may actually hurt homebuyers, and any signs of improvement in the housing market.
Starting April 1, any borrower with ongoing disputes with creditors over debt above $1,000 will no longer qualify for FHA-insured loans. Prior to this change, lenders could choose to approve or deny applications if disputed debt existed, but now they no longer have a choice.
Borrowers with disputed debt over $1,000 must now pay off the debt before closing on any FHA loan, prove they are making payments, and/or explain the dispute as identity theft or fraud. The latter option requires borrowers to provide full documentation, such as police reports of theft or fraud.
The reasoning behind this change is admittedly logical - the FHA is attempting to reduce risk and boost capital as they face reserve fund balances falling below legal mandates. Agency officials also contend that the new requirements are a protection measure for borrowers, preventing them from getting in over their heads.
But industry analysts suggest the new rule could have negative and far-reaching consequences.
Overall, FHA loans offer first-time buyers and those needing low down payments an option they may not have elsewhere. The average FHA loan requires a 3.5% down payment. The new rule could present a roadblock for otherwise willing and capable home buyers, and as such could slow already sluggish home sales.
In a market now reporting the fifth consecutive month of falling home prices (a new low), this could be a hit that hurts.
For those with disputed debt and looking into FHA loans, here are additional details to know:
More Related Articles: