FHA to relax new credit standard

The Federal Housing Administration recently announced it planned to implement a new set of credit standards when issuing mortgage backed by the agency.

The Federal Housing Administration recently announced it planned to implement a new set of credit standards when issuing mortgage backed by the agency. However, after a number of critics voiced concern that the measures would disqualify too many borrowers, the FHA has announced that it will relax the new lending regulation.

"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 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."

The FHA planned to to implement a new credit standard that would disqualify borrowers from obtaining an FHA-backed mortgage if they had outstanding credit disputes that amounted to more than $1,000 and had not repayment plans in place.   

However, since many borrowers with credit scores below 700 have credit disputes of this magnitude, analysts at the FHA warned that it would cut the agency's book of business too greatly as a result. Some predictions estimated a decline of 33 to 50 percent in origination during the period after the credit standard went into action. 

Instead, if a borrower can prove that an outstanding credit dispute is the result of a life event, such as a medical emergency, death, divorce or unemployment, they may be able to still qualify for an FHA-backed home loan. 

"The borrower may provide a written explanation and documentation as it applies to all types of disputed and collections accounts if it makes sense, and is consistent with other credit information in the file," the FHA recently announced.

The rule was originally designed to bolster the FHA's mutual mortgage insurance fund, which was significantly reduced in the wake of the housing market collapse. Last year, the capital ratio of the fund fell to an all time low of approximately 0.2 percent. Without changes to credit standards, and the implementation of higher insurances rates, the FHA may have been in need of the next major bailout from the Department of the Treasury.



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