FHA: Pay Down Debt First
If you’re thinking about applying for a mortgage loan from the Federal Housing Administration – or refinancing your current loan – you may soon have a new roadblock. If you owe more than $1,000 in debt that’s in collection, an FHA loan will be off limits to you starting this summer, due to a controversial new rule that goes into effect July 1.
Postponed since original start date of April 1, the rule prohibits borrowers with more than $1,000 in disputed collection accounts from obtaining a federally backed FHA mortgage. Prospective borrowers can reapply once they pay off these outstanding collections.
Leisel Taylor, a Realtor with Keller Williams Preferred Properties in Upper Marlboro, Md., says the rule was devised to decrease the risk of default.
“The FHA noticed that most of the defaulted loans were borrowers who had a significant amount of debt on their credit profile,” says Taylor, who notes that the new rule will hit hardest on first-time homebuyers, many of whom have debt-collection challenges.
“This issue impacts individuals who have debts in collections, including credit card and medical debt,” says Hale Walker, senior vice president of First Preferred Mortgage Company in Detroit. “This is about common sense for the FHA. From the lender’s perspective, the chances are that these borrowers will not take homeownership seriously, and that ultimately puts the lender on the hook for that potential default liability.”
To qualify for an FHA loan, barred borrowers should carefully monitor and correct any inaccuracies in their credit report (visit annualcreditreport.com for a free report0, pay their debts on time, and get on a payment plan to whittle down any debts in collections. Matt Hackett, an underwriting manager with Equity Now in New York, said that a collection agency may be willing to accept an amount lower than the balance to settle an account.
Further, analysts with JPMorgan Chase predicted that the rule might cut demand for FHA loans by up to 20 percent in the next few months, which could be a significant blow to the real estate rebound.
