Tougher credit standards for FHA-backed loans

The Federal Housing Administration has introduced a new set of guidelines that could potentially deny borrowers with outstanding debt from having their mortgage backed by the agency.

The Federal Housing Administration has introduced a new set of guidelines that could potentially deny borrowers with outstanding debt from having their mortgage backed by the agency.

Starting in April, the FHA will no longer backed the home loans of borrowers who have ongoing credit disputes of more than $1,000. Analysts say the implementation of this lending regulation is a milestone for the agency, as it previously had no restrictions of this caliber in place.

Under the new regulation, borrowers must settle all credit disputes exceeding $1,000 prior to having their mortgage backed by the FHA or prove that they are have entered some sort of payment arrangement. This payment arrangement will then be evaluated by individual lenders as well as the government agencies as part of a borrower's debt to income ratio.

However, some industry experts say this new rule could have a negative impact on the amount of underwriting the FHA performs. Real estate attorney Jeremy Radack revealed to HousingWire that he expects a total reduction of 33 to 50 percent of FHA mortgage loan origination during the course of 2012 as a result.

"Take the 750 borrower with a medical collection outstanding from five years ago when they were in college for $5,000. Is that really a bad loan? I don't think FHA looked at how much of their performing borrowers have collections accounts," Radack said, according to the news source. "There are so many other things they could do to mitigate risks to the fund."     

However, not all credit disputes will be taken into account under the new regulation. If a prospective borrower has a dispute that is more than two years old, or as a result of identity theft, it will not be counted against them in the qualification process. However, the borrower must provide a police report proving that a dispute was a result of fraudulent activity against them.

"We expect this revision will certainly kick some buyers out of the marketplace, and we’re in ongoing efforts to quantify how extreme the impact will be," said John Burns Real Estate Consulting senior vice president of research Lisa Jackson. "We did a quick sample of some of our builder clients focused on the entry level. They cited impact to varying degrees, with one reporting the new rule would disqualify 60 percent to 84 percent of his buyers currently under contract at specific communities." 

Analysts at the FHA say the move is an effort to further protect the agency's emergency fund that has seen its level slip significantly in the wake of the housing market collapse.



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