More good news on the loan application and approval front….In an effort to more fairly treat borrowers whose credit reports contain collections actions and disputed debt accounts, the Federal Housing Administration (FHA) has eased previous rules that would have led to large numbers of application rejections.
The agency also released guidance to lenders instructing them on how to handle “extenuating circumstances” claimed by borrowers who experienced serious economic setbacks triggered by the recession, but who are now employed, paying their bills and seeking FHA financing.
Last week, the FHA issued two mortgagee letters spelling out its new approach to widespread credit issues affecting applicants for its low down payment loans. That guidance, which required payoffs of collections or disputed accounts totaling an aggregate $1,000 or more before applicants could go to closing on an FHA loan, triggered intense criticism from lenders and community groups.
The rules, which take effect Oct. 15, exclude consideration of all medical collection and charge-off accounts, and “do not require resolution” for applications to move forward.
FHA’s approach to “extenuating circumstances” that may have triggered steep drops in applicants’ credit scores. Far more so than conventional market investors or insurers, FHA historically has been more willing to consider the contributing factors that make credit-impaired applicants look more risky than they really are. The new guidelines emphasize that “FHA recognizes the hardships faced by … borrowers (hit by recession events) and realizes that their credit histories may not fully reflect their true ability or propensity to repay a mortgage. Extenuating circumstances are important to FHA in evaluating whether a borrower who experienced a foreclosure, short sale, deed-in-lieu, bankruptcy or other event in the past but is now employed and paying credit accounts on time should be considered eligible for a new FHA-insured loan.
This should help many people in their quest for home ownership!! Welcome relief for many!!
Paddy Deighan J.D. Ph.D
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