New FHA rule will affect credit for homebuyers

Experts say a new ruling by the Federal Housing Administration is likely to rule out thousands of potential buyers from securing a government-backed mortgage when it comes into force next Monday.

On April 1 the FHA  will no longer issue mortgage insurance for any borrower involved in an ongoing credit dispute worth $1,000 or greater, according to Housing Wire.

In order to qualify for an FHA-backed loan, borrowers will be required to settle any credit disputes in full, or else agree on a payment plan with their creditor and make a minimum of three payments before being considered. If a borrower decides to go for the payment plan route, this will need to be properly documented and then submitted to the FHA with their application. The payment plan will then be taken into account when the borrower’s debt-to-income ratio is calculated.

Disputed credit accounts more than two years old, and credit disputes linked to possible identity theft will not be included.

Still, housing industry professionals are worried that thousands of potential buyers will be unable to secure a new mortgage once the rule comes into force.

Experts say as many as 30 to 50% of potential homebuyers could be affected.

Walt Fenton, mortgage lender with First Security Bank in Rogers, said ongoing credit disputes stand in the way for conventional loan approval as well.

"I am working with a client now who was forced to clear the disputes from his credit report before the lender would consider his loan. It took him about 60 days working with credit agencies to remove the disputes from the credit profile. Once that happened the lender approved the loan. He is supposed to close next week," Fenton said.

He advises prospective homeowners who have already disputed issues on their credit report to get them cleared before they pursue financing. Fenton said once the loan has closed the homeowner can often reopen the dispute at no consequence.

The rule was necessary to protect the agency's emergency fund, which has dropped below the minimum amount mandated by Congress, because of the increase in mortgage defaults in recent years.

Fenton said a bigger concern for his customers is the stiff increase in FHA mortgage insurance that will go into effect April 9.

The origination premium of 1% of the loan amount will increase to 1.75% and the monthly insurance premiums will rise from 1.15% to 1.35%.

Fenton said the higher premiums make the FHA more expensive and essentially reduce the buying power for low to moderate income earners. The trade-off he said, is a lower downpayment – 3.5% for FHA, versus 5% with conventional financing.