It’s Tuesday News Day and today I am talking about a decision by the Federal Housing Administration to rescind tough new credit restrictions on their low interest FHA Home Loans.
In a policy switch that could be important to thousands of applicants seeking low-down-payment home mortgages, the Federal Housing Administration has rescinded tough new credit restrictions that had been scheduled to take effect.
The policy change would have affected borrowers who have one or more collections or disputed-bill accounts on their national credit bureau files in which the aggregate amounts were $1,000 or more. Some mortgage industry experts estimate that if the now-rescinded rules had gone into effect, as many as 1 in 3 FHA loan applicants would have had difficulty being approved.
Under the withdrawn plan, borrowers with collections or disputed unpaid bills would have been required to “resolve” them before their loan could be closed, either by paying them off in full or by arranging a schedule of repayments. In effect, if you couldn’t resolve the outstanding credit issue, you might not be able to obtain FHA financing.
Critics of the policy complained that it tilted the scales too heavily in favor of creditors and disproportionately harmed FHA’s traditional core borrowers — low- to moderate-income families, first-time buyers and minority groups. Other critics argued that the policy would not help the FHA weed out serious credit risks since private lenders already are doing so by imposing their own credit score and other restrictions on applicants, known as “overlays” in the mortgage industry.
As it is, the FHA’s recent average scores are far higher than historical norms. According to an analysis by Ellie Mae, a company that tracks conventional and FHA loan originations, the average FICO score for an FHA-approved loan to buy a house in May was 713. Though down slightly from March, when average FICOs for purchases hit 724, according to Ellie Mae, both scores suggest a strong trend toward financing applicants who have relatively fewer issues in their credit files.
Meanwhile, if you plan to apply for an FHA loan and you think you have collections or disputes on file, here’s the good news: You won’t be forced to pay off or resolve the accounts before closing, but you are likely to have your application referred for manual underwriting, in which a loan officer takes a hard look at the facts and circumstances of your collections or disputed accounts. This will almost certainly slow down your approval. There are exceptions, according to the agency, such as when the disputed account is both less than $500 and more than 24 months old.
Once again, getting all the facts straight before seeing homes is one of the most important things a home buyer can do. Running a credit check and working with a reputable lender to boost your scores before applying for a loan helps you not just get a better rate but also with obtaining an actual loan.
If you are thinking about purchasing a home in the next couple of months here are some things to keep in mind to avoid having your loan application rejected.
Also, with the new tougher regulations on not only FHA Loans but also Conventional Home Loans here are what lenders are now looking at most. They are credit score (willingness to pay back), assets (including savings accounts and investments), and the continuation of funds (a steady and secure job). For a more in depth discussion on what lenders are looking for in this new housing market check out my previous post on what has really changed since the sub-prime meltdown.
Because of the many legal and tax situations that can arise through the sale and purchase of real estate ALWAYS consult with your ATTORNEY or ACCOUNTANT before making ANY decisions in ANY transaction
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* THIS ARTICLE WAS POSTED AT Thomas Feng’s Bay Area Connect *