While FHA mortgages are popular for being consumer friendly while offering flexible credit guidelines, the recently changed collections and default rules that were effective April 1st were a step backwards for the Federal Housing Administration. After one week in place, the credit changes for FHA loans have been delayed until July, 2012. In the meantime, FHA has stepped back and will be accepting outside feedback on these new rules.

The current FHA mortgage guidelines state that if the credit report shows that a borrower is disputing any credit accounts or public records, a DE underwriter must review the mortgage application. In addition, FHA does not require that collection accounts be paid off in order to receive mortgage approval, although court ordered judgments must be paid off in order for the mortgage to be eligible for an FHA insurance endorsement. These are the minimum guidelines set forth by FHA, but lenders can and do add their own stipulations to these rules. DE underwriters look at the entire credit file and make a determination based on the entire profile. If something occurred many years ago and since that time, the borrower has shown financial responsibility, the underwriter takes this into consideration.

The recent FHA changes, that are now delayed, require that borrowers who owe a total of $1,000 or more for defaults and/or collections must pay them off in full, have a payment arrangement in place for at least three months or, in the case of theft, have documentation showing proof. The only exceptions are for mortgages that receive an accept from automated underwriting. In these cases, the total outstanding amount must be under $1,000 and must be aged two years from the date of the last activity. These new rules caused quite a stir in the lending world for several reasons. First, when paying off an old collection, this account now becomes active on the credit report and will have a negative affect on credit scores. Second, payment arrangements must show three months of payments which would keep some FHA mortgage applications that are already in the pipeline from closing. For a home purchase, this amount of time could completely destroy the real estate deal. In addition, after making payment arrangements, paying for three months and waiting the necessary time to apply for an FHA mortgage, the credit scores will drop and may put the borrower into the higher 10 percent down payment category for an FHA mortgage. On the average, changes to credit usually hit the credit report and affect credit scores within 90 days.

Now delayed until July 1, 2012, FHA is accepting comments and questions about these changes until the effective date and will clarify guidance as needed. In the meantime, the old guidelines will remain in place for assigned case numbers. These changes, when put into affect, may indeed put more potential borrowers out of the housing market for quite some time.

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