RETURN TO HOMEMortgage Monday
There have been many changes in FHA regulations in the past few years. They have changed (increased) lots of fees including the Mortgage Insurance Premium (MIP) amount required for upfront and monthly amounts. They tightened qualifying guidelines to mirror those of Fannie and Freddie, increased minimum credit scores and other reasonable requirements in order to borrow hundreds of thousands of dollars.
One of the most recent changes FHA is initiating is the “no collection accounts” rule, and some people are in an uproar. Previously, FHA allowed outstand collection accounts to remain as is when qualifying for a mortgage.
As of July 1st, 2012, the rule will require people to pay off collection, unpaid or disputed accounts over $1,000. The thousand dollars is for total collection accounts, not each one individually. If they cannot pay it in full (settled), then proof of a payment plan with three months history must be shown.
In the past, collection or disputed accounts were not required to be paid off, but court ordered judgments had to be. This meant that a borrower had to hold off a creditor until after they closed the mortgage.
Statistics note that at over 5% of potential FHA borrower has at least $1,000 of collection or disputed accounts and will be disqualified for a mortgage. This will harm the lending market and in turn the real estate recovery.
Many people do have collection accounts that have resulted from medical debt, divorce, and unemployment or identity theft. Some of these accounts will not be required to be paid off, but proof of circumstances will be mandatory.
The fact is that if someone intends to buy a home and borrow hundreds of thousands of dollars, they should not be going into it with bad debt. Truly, the prudent thing to do is to take care of a situation when it happens and not wait until you want to borrow more money and act surprised that you have a judgment. Most people have fair warning when they have a medical bill in dispute because of insurance, when they lived off of credit cards or when an ex banged up a credit card. I am not saying the bad things do not happen to good people, but every borrower should take responsibly for their own finances.
It is easy to get a free copy of a credit report every year and make sure there is nothing that needs to be taken care of. Taking care of bad debt at the time it happens is much easier than when it is years old. It also has a less negative effect on a credit score. So in light of this new rule and in the face of financial prudency, if you think you have any bad debt, take care of it before you apply for a mortgage.