FHA Relaxes Lending Rules

The Federal Housing Agency has relaxed 2012 lending rules that threatened to increase the rejection of loan applications. The agency provided new guidance to lenders for treating extenuating circumstances claimed by borrowers who are now employed and paying their bills. The previous guidelines required collections and disputed accounts of $1000 or more be paid off before a loan be cleared. Critics pointed out that many disputed accounts, such as medical bills exceeding the initial estimate, are beyond borrowers’ control. The new rules exclude consideration of medical collection and charge-off accounts and will not require resolution for submitting an application. When there are collection accounts, the approval reason is required. If the total exceeds $2000, then lenders must check if the borrower can handle periodic payments to retire the debt. Such analysis may result in the applicant paying off the debt or making arrangements with the creditor. These debt payments are included in the applicant’s debt-to-income ratio. Disputed accounts will be handled separately. If the disputed items total $1000 or more, then the application must be manually underwritten. However, if they are less than $1000, manual underwriting is not required. Furthermore, disputed accounts from medical charges or identity theft are excluded from this limit. Court-ordered judgments will be treated differently. They must be fully paid off, or there must be a written agreement outlining payments and documentation that three payments have been made. A second guideline explains the FHA’s approach to unfortunate circumstances that can impact an applicant’s credit score. The new letter states that the FHA understands borrowers’ difficulties in the previous recession and that credit history may not accurately represent one’s ability to repay debt. When the FHA considers a loan for a borrower who experienced a foreclosure or similar event, but who is now employed and paying off debt, they take into account the borrower’s situation. The new rules allow for the mortgage waiting period from such events to be waived. For example, if an individual lost their job, could not pay their mortgage, and was eventually was foreclosed upon, the waiting period for a loan is three years. If the applicant has experienced financial trouble that was beyond their control and resulted in loss of employment and/or income that reduced their household income by 20 percent for six months, then the applicant could qualify for an FHA loan in one year instead of the standard three.