FHA Update - Collections Totaling $1,000
This is a great time to purchase a home and we're not just saying that. Interest rates are at rock-bottom, the market is soft keeping home prices low and there are a lot to choose from.
But since the first of this year we have noticed a tightening in the Federal Housing Administration's (FHA) underwriting guidelines. Here is a paraphrased summary of the news letter sent to mortgage banks this week.
EFFECTIVE April 1st, the FHA buyer who has collections totaling $1,000 or more that are not in an active repayment plan will no longer be able to get an FHA loan without paying them all off.
The existing guideline reads:
FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, courtordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.
The new guideline reads:
If the total outstanding balance of all collection accounts is equal to or greater than $1,000 the borrower must resolve the accounts (e.g. entered into payment arrangements with minimum three months verified payments- paid as agreed) or paid in full at the time of, or prior to closing. Mortgagees must document the case binder showing each account was resolved or paid in full. If the total outstanding balance of all collection accounts is less than $1,000, the borrower is not required to pay off the collection accounts as a condition of mortgage approval. FHA continues to require judgments to be paid off before the mortgage loan is eligible for FHA insurance.*
* Exception: An exception to the payoff of a court-ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments, and provides documentation indicating that a minimum of three months payments have been made according to the agreement. The monthly payment must be included in the borrower’s debt-to-income ratio. Examples of acceptable documentation to support the resolution of disputed accounts or the payoff of accounts would be a letter from the creditor outlining the terms of the payment arrangements, or verifying payoff of debt, cancelled check(s), or a supplement to the credit report verifying payoff or payment arrangements. Note: Paying “down” of balances on disputed accounts and collections to reduce the singular or cumulative balance to below $1,000, is not an acceptable resolution of accounts.
This is the second large FHA guideline change since the first of the year from FHA. If you are thinking of buying a home strike while the iron is still hot.
Let us know if we can help.