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FHA Tightens Credit Guidelines for Insured Mortgages

Written By:
April 05, 2012 at 1:24 AM

A new rule change by the Federal Housing Agency (FHA) has made it tougher for borrowers to qualify for FHA-insured mortgage. The state of the economy has made FHA mortgages more popular for homebuyers looking to finance home purchases. Borrowers who have more than $1000 in debt disputes will not qualify for an FHA mortgage without proving the resolution of credit issues. The rule change in the FHA underwriting standards will even affect people who have perfect credit scores.

Under the general underwriting criteria, FHA have always allowed FHA-approved mortgage to make a decision within their underwriting departments on whether or not the borrower met qualifications for FHA insured loans. For example, if the borrower disagreed with certain medical or hospital charges, the mortgage lender made a call as to the legitimacy of the disputed account. The FHA lender determined if the matter presented grounds for rejecting the FHA loan mortgage application.

The new procedure will require lenders to prove to the FHA that it based its decision on solid documentation. The FHA recently had an audit, which revealed an agency at risk of needing a substantial federal government bailout if the housing market conditions worsen. The assessment showed that FHA had nearly depleted its reserve fund, well below the levels legally mandated by congressional guidelines.

The FHA wants to reduce its risk in the housing market. This program change follows several other recent moves mad by FHA to accomplish this objective. FHA has also increased the cost of insurance premiums it charges FHA insured borrowers.

What FHA Borrowers Must Do

To qualify for FHA insured mortgage borrowers must take the following steps if the debt adds up to a $1000 or more:

  • Pay off the obligation
  • Provide proof of making payment on the deputed debt
  • Explain why the disputed loan is incorrect and provide documentation

Borrowers will need to have one of the above solutions in place to demonstrate a resolution and to close the financing for an FHA-guaranteed mortgage.

Exceptions for Older Disputes

Borrowers who have debts that have been in depute from 24 months back will not have the disputed obligations counted against then during the FHA mortgage underwriting process. In addition, issues related to fraud or identity theft will not affect the borrowers. Applicants will have to provide evidence of such cases to the mortgage lenders.

The concerns are that tightening this aspect of the underwriting requirements will make it difficult for many borrowers to qualify for FHA mortgages. The changes will come at just the time the housing market has shown signs of a possible recovery. Some lenders believe the new requirements will speed up the FHA loan approval process.

FHA insured loans allow homebuyers to obtain affordable, low- interest rate mortgages. FHA loans require homebuyers to make a down payment of approximately 3.5 percent of the purchase price of the home. Usually, most conventional lenders want 10% to 20% down payments. Since the housing crisis begins four years ago, FHA insured mortgage has made up 15 to 20% of all loans approved for home purchases.

Underwriters Make Final Determination

The FHA new guidelines grant the mortgage lender’s underwriting department the authority to make the final decision. Borrowers will have to provide the lender documentation to prove their cases. Loan applicants should expect stringent evaluations. According to a letter sent to FHA lenders, the borrower’s explanation for the dispute “has to make sense” and the reasoning has to be congruent with other credit data contained in the homebuyer’s credit profile.

FHA retains the option of denial of loans if it determines that certain decisions do not have adequate support. It would mean the mortgage lender would have to carry the risk of an uninsured loan on its portfolio.





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