Q: How will the unpaid collections on our credit report affect us in the long run?
A: Effective July 1, the Fair Housing Administration (FHA) limits total collections/judgments to $1,000 on each borrower’s credit report.
Q: How will this new FHA guideline prevent borrowers from getting an FHA loan?
A: More than half of all borrowers have some kind of collections on their credit report. Most collections and judgments exceed $1,000. Even borrowers with perfect credit scores may be denied a loan with a single $1,000 medical collection.
Q: I want to buy a house. I have a good job and good credit. Will the medical collections on my credit report prevent me from getting a home loan? What should I do?
A: The new FHA guideline is a big change to how loan officers/underwriters will interpret collections and judgments. FHA will need to see that you are in an approved payment plan and have proof of making payments for 90 days before a loan can be approved for you.
These new payments also will count as a new debt against your total income.
Q: What does FHA consider as a judgment?
A: Court-ordered judgments must be paid off before the borrower can be considered for a FHA loan.
Q: My disputed credit accounts/collections are a direct result of identity theft, credit card theft and/or unauthorized use. Can they be excluded from the $1,000 limit?
A: Yes. The borrower will need to provide proof of disputed collection accounts as a result of identity theft.
Q: What percentage of borrowers will be denied an FHA loan because of a collection account?
A: Most local loan officers I talked to recently estimated that about 10 to 20 percent of borrowers will be denied an FHA loan.
Q: Will FHA allow any exceptions?
A: In a notice to lenders, FHA said that disputed or collection accounts “resulting from life events such as medical, death, divorce, loss of employment, etc.” could be exempted from the $1,000 limit. Borrowers can provide a written explanation and documentation as it applies to all types of disputed and collection accounts if it makes sense, and is consistent with other credit information in the file, the notice said.
Q: Why are collections preventing borrowers from getting a loan?
A: Collections are negative credit information that must be considered when manually underwriting a loan.
Q: Why is the credit report such an important tool to determine loan eligibility?
A: It is true that FHA is about to make it even tougher to borrow money federal money to buy a home. The change is part of the agency’s effort to reduce its risk as it grapples with a depleted reserve fund that has fallen below legally mandated levels. The FHA insures mortgages that are originated by private lenders. To help bolster its capital reserves, FHA also hiked the insurance premiums it charges borrowers as of April 1 (check with your local loan officer for guideline details).
Disputed accounts going back more than two years, along with those related to fraud or identity theft, will not count against the borrowers, according to the FHA. But, lenders must get evidence, such as police reports, that document client claims of identity thefts or fraud charges.
Although your lenders have the final say on loan approval, few lenders will approve a loan that FHA rejects because they do not want to hold a 96.5 percent LTV mortgage on their own books.
Word to the wise: Work with an experienced local loan officer to repair your credit if you are in the market to buy a home. Check your credit annually and make necessary disputes as needed.
Annie Christian is a real estate broker and owner of The Annie Christian Real Estate Group. She helps with everything from buying and selling to foreclosure and short sale. To submit a question, call 351-5117. Her website is www.anniechristian.com.