The Federal Housing Administration (FHA) recently rescinded its more stringent requirements for financing home loans to buyers with collection or disputed-bill accounts of $1,000 or more. Even if a collection account was opened in error, the rescinded rule would have required the buyer to resolve the issue before closing on the home loan.
This restriction announced earlier this year was to go into effect on July 1, 2012. Critics of the rescinded rule claim low-income and minority applicants were being pushed out of eligibility by these increasingly high lending standards.
The FHA will release a revised rule on collection accounts which will consider collection and disputed bill accounts separately. Until these revised rules are provided, buyers with these accounts on their files will likely be referred for manual underwriting, which will increase the time taken to review a buyer’s loan application.
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With this in-house review, lenders make more informed lending decisions, and qualified buyers are approved. Reliance on strict rules without a human brain in the mix to resolve the disparities (such as occurs with disputed accounts) is substandard and lazy. The additional time it takes their staff to personally process these applications manually is worth the wait.
Brainless reliance on these rules would be akin to lenders’ heavy reliance on FICO scores, which too often misrepresent a buyer’s financial capacity.
Still, the FHA’s rescission may not be permanent. The issue has been rescinded pending further clarification of their policies – thus, a similar, revised rule will be announced sometime soon.
Re: Federal Housing Administration rescinds tough new rules on mortgage applicants from the Washington Post and Mortgagee Letter 2012-10 from the U.S. Department of Housing and Urban Development