FHA Loan Articles
Changes to FHA Loan Rules on Collections and JudgmentsIn March of 2012, there were reports of pending alterations to FHA rules on collections and judgment actions that could affect an FHA loan application. A borrower who had outstanding collection actions against them would be affected by the changes in FHA requirements.
According to FHA Mortgagee Letter 12-03, new changes to the rules for collections and judgments were due to change as follows:
"If the total outstanding balance of all collection accounts is equal to or greater than $1,000 the borrower must resolve the accounts (e.g. entered into payment arrangements with minimum three months verified payments- paid as agreed) or paid in full at the time of, or prior to closing."
Those changes as described above have been cancelled pending further review by the FHA and HUD.
FHA later issued a new Mortgagee Letter stating that the new requirement, due to take effect on July 1, 2012, has been rescinded and will not take effect pending clarification and additional guidance.
FHA Mortgagee Letter 12-10 explains the cancellation of the new rules. "In order to provide clarification of policies concerning Disputed Accounts and Collection Accounts through future guidance, FHA is rescinding the new guidance on the following topics in Mortgagee Letter (ML) 2012-3, which was to become effective July 1, 2012-"Handling of Disputed Accounts, Public Records FHA Total User Guide Chapter 2, and Handbook 4155.1 4.C.2.e, Paying off Collections and Judgments."
This can be a confusing issue for some borrowers. At the time of this writing, FHA rules currently in effect state:
"If the credit report reveals that the borrower is disputing any credit accounts or public records, the mortgage application must be referred to a Direct Endorsement underwriter for review."
Also, "FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement."
That is the rule in effect at the time of this writing.
It should be noted that the FHA has not stated that these changes are permanent-future guidance and clarification on these rules is under development. For more information, see FHA Mortgagee Letter 12-10 at the FHA official site.