Getting an FHA loan just got harder

Rules kicked in on Oct. 15 that factor some credit blemishes into homebuyers' debt-to-income ratios.

By MSN Real Estate partner Oct 15, 2013 6:12AM

Image: Woman with paperwork © Getty ImagesBy Christine DiGangi,


New requirements for Federal Housing Administration-approved mortgages took effect last week, presenting potential roadblocks for homebuyers with collections or judgments in their credit histories.


While lenders have recently been able to take significant economic events into account in processing loan applications, the changes are a step in the opposite direction for loan accessibility. The Department of Housing and Urban Development issued mortgage letters Aug. 15 instructing lenders to add collections accounts and judgments to an applicant’s debt-to-income ratio, one of the qualifying standards for an FHA loan. Loans made on and after Oct. 15 must follow these guidelines.


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What lenders must look at

Charge-offs and medical collections are not included in these new standards, though they have a negative impact on credit scores and will therefore be factors in consumers’ creditworthiness. For an applicant with more than $2,000 in collections accounts, the lender is required to incorporate those debts into the debt-to-income ratio, because paying those debts may interfere with the ability to make mortgage payments.

“It’s very dramatic because typically FHA has been geared toward people with less than perfect credit,” said Eddie Hilliard, a loan originator at Mortgage Acceptance Corp. in Florida. “Now for them to not only have to explain away the collections and judgments but to add them to the debt ratio — it’s really going to put them out of sorts.”


Collections accounts do not need to be paid off in order to qualify for an FHA loan, but judgments do. An exception can be made to the judgment rule if the borrower can arrange a payment schedule.

Additional obstacles

The squeeze potential homebuyers may feel will be compounded by another regulation that takes effect Jan. 10. As part of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the maximum debt-to-income ratio will be 43 percent.


“Now, depending on the Automated Underwriting System findings, you could go as high as 55 percent,” Hilliard said.

The AUS analyzes completed mortgage applications and applicants’ credit histories to generate loan decisions. Some applications are manually underwritten to consider circumstances of the debt, and by the new guidelines, mortgage applications of consumers with disputed credit accounts of more than $1,000 must be manually underwritten.


Such adjustments are steps toward strengthening the FHA loan program, which has been stressed since helping to fill the gap created by the collapse of the subprime-mortgage market.


In some states, the regulations reach farther. In the nine community property states, even if one goes about the mortgage process alone, a spouse’s collections and judgments are factored into the debt-to-income ratio. Those states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.

For anyone going for an FHA mortgage, the key is to pay those debts: Any payments that can lower your debt-to-income ratio will help. Take stock of your credit profile by reviewing your free annual credit report and ways to strengthen your credit. The Credit Report Card is a free tool that shows you which areas of your credit you need to work on, and there are several approaches that can help consumers reduce collections debt.


"The best option now is to get ahead and make your debts right," Hilliard said. "Try to get a settlement, reach out to that creditor, make payments. You're going to have to start making arrangements to clear that credit up."


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Tags: loans
Nov 20, 2013 8:36AM
I got an FHA loan but made sure my credit was in order, had money in the bank, to show I'd be ready for big loan, a stable job along with my wife and it still was tought to get an FHA loan but it should be tough because they are loaning you a huge sum of money and they need to feel that giving you a loan is at the least risk possible.  When i got my home your Fico Score had to be 640 and above.  I think they should raise that requirement to 660-680 to force potential borrowers to get their credit in check before they think about buying a house.  It will force borrowers to spend smart, budget their money and actually SAVE money which you will need to do regardless if you get an FHA loan or not.  I just hope the economy gets going to get people to work, because without enough jobs, no one will be able to buy houses and the housing market will continue to suffer.
Nov 3, 2013 10:49AM
Screw the walkaways. Screw the people who cannot handle 2k in bills. What makes you think you idiots can handle 200.000 mortgage ? WTF. Its time for 20percent down with a 750 credit score. And a real job to pay for it !! And for all the people who walked away when you all could paid your contract and thats about 75% of all the foreclosures you will never own a home unless you pay cash. What sellers do as far as land contracts. take your risk selling to these useless POS... For people like me who did everything right and  never been late its time for us to get the value back into our homes and keep it. It make take a other 10-15 yrs . But knowing that none of you idiots can get a mortgage makes me overjoyed... Screw all you people. Rent pay cash or have an idiot seller trust you at least its not a bank or the government backing a useless POS. 

Oct 24, 2013 7:37PM
I see a lot of posts about how credit worthiness should be factored into a mortgage application.

While I agree with that assertion, this article isn't about that, it's about loan repayment. Since collections and judgments may need to be repaid, they should be counted in the debt to income calculation. You can't just throw car loans out of the debt to income calculation, why should other obligations be ignored?
Oct 24, 2013 7:24PM
Wait, a 55% debt to income ratio? In what world is this a good idea? 
Oct 24, 2013 6:53AM
Look for owner-financing through For Sale By Owner listings.
Work out a Rent-to-Own agreement w/ the seller and keep the Banks from ruining your life.
Owner-financing/Seller Carry/Rent-to-Own are what will keep millions of Americans on track for their dream of home ownership.
When life, or the govt/banks, hands you make lemonade.
Oct 23, 2013 7:19AM
So we finally put some common sense back into lending requirements, and look at all the whiney losers. What ever happened to saving for a bigger downpayment? Taking a smaller mortgage reduces your debt to income quickly. Oh, I forgot, our entitlement mentality means we should get everything we want, NOW. When you look under the hood, you find many of these people spending as fast as they make it. Stop going out to dinner, give up your cable, what ever it takes. Put some money away, and maybe, just maybe, the mean old banker will see you as responsible adult, and give you a mortgage.
Oct 23, 2013 7:16AM

A year ago this past August my husband and I purchased our first home with an FHA loan. We realized the importance of getting our credit in good standing and took the time to pull our credit report, call past due collections from years ago and to write letters to have things taken off. It was a pain but that's the price you pay for being young and not caring about your credit. 

When applying for almost any loan they almost always take the lowest score. In order to get approved for an FHA loan when we applied your credit score had to be above 580 (which requires 10% down) but they prefer 680 (only 3.5% down) and above.  I can see that 580 is way too low to give someone a loan for a HUGE purchase. It's a risk! Not only for the bank but the homeowner, who needs to be schooled on credit and how it works. I think this was an obvious decision after considering what happen to the banks and to people that are/were living beyond their means.

Teaching and educating people young and old about credit and it's affects is imperative in order to get the U.S. back on top!

Oct 23, 2013 7:12AM
Honestly nothing is really changing. collections accounts and judgments have always been looked at for years. It may not have been included in the DTI however a person with unpaid collection accounts and judgments have had to submit a letter of explaining these. And on an FHA cash out refi these accounts would have had to be paid at closing from the cash back at closing. And charge offs and medical collections along with education debt have also always had to have been explained as well. And some lenders have required them to be paid in full as well on a refi. On a purchase they have been overlooked depending on the time of the account and the amount. And FHA has not been geared to people with less then perfect credit. That statement is not true. FHA is geared for people who may have only had a 3% down payments and for people whose credit score did not qualify for Conventional loans. Loan programs for people with less then perfect credit were the non conforming loans which helped destroy the mortgage industry. People who had credit scores below 500 and lied to lenders about funds and employment. As far as making the DTI up to 55% all we are doing now is bringing back the non conforming loans and this will destroy FHA in the end and will further ruin the mortgage and housing sectors.
Oct 23, 2013 7:11AM
The government shouldn't be in the housing loan business. Leave that and the associated risks with the private sector.
Oct 23, 2013 7:09AM

People.  If you own property......and wish to it owner carry.   If you are a buyer?  Look for owner carry property for sale.   KEEP THE BANKS OUT OF YOUR PROPERTY AND LIFE. 

Oct 23, 2013 7:05AM
people should be held accountable for past debts and collections. Do the crime, Do the time. We cannot afford to repeat the giveaway loan programs of the past 
Oct 23, 2013 6:30AM
Don't see how this could be considered a bad thing....
Oct 23, 2013 6:24AM

I am 29 years old me and my wife have credit of upper 600 hundreds and we both work . But with student loans and other debts we will never be able to buy a home in America.  The American dream is dead.

Oct 23, 2013 6:24AM
my husband and I pay ALL of our bills and a HUGE health insurance payment of $1500. a month and yes we did fall behind on our co insurance payments from last year when we both ended up in the hospital.  We are NEVER late on our mortgage but could not keep up with paying thousands to the hospital (our portion of the bills that insurance did not cover) every month.  Therefore, what im trying to say is that not everyone who has late hospital/doctor bills is a deadbeat.  We do what were supposed to do and raise our kids the same way but when you end up with $10,000 in co insurance bills on top of the $1,500 you pay in premium monthly you can certainly get behind. 
Oct 23, 2013 6:16AM

Now heres a novel idea;   (1) if you have crappy credit, you don't get a loan  (2) You don't work for a living or you make a crappy wage but you want to "barrow" hundres of thousands of dollars that you are completely unable to make payments on.

Making it much tougher?  Not, just denying huge loans to those that can not afford to buy,  How simple is that. 

Oct 23, 2013 6:13AM
Oct 23, 2013 6:12AM
This country was built on racism, slavery, hypocrisy, lies and war!! I hope that the people who complain about the government never loses their job or anyone in their family...People fall on hard times or born into situations beyond their control and need the help that this country/ government can and should provide..Hell... WE give more money abroad then we do in our own country. Oh yeah.. To the guy that hates Immigrants?? You must hate yourself because WE ARE ALL immigrants from somewhere else..SMH.. Unless your ancestors were moors or Native Americans?? YOU ARE AN IMMIGRANT!!! So before you speak know your history.....Sorry to break this news to you, but there is no such country named "Black or White, so where would you go? And take your country back from whom? You can't take back something that was NEVER YOURS!!! America was stolen and then built on the backs of SLAVES.. GEORGE WASHINGTON was the 8th and NOT the first president of The United States!! The first was John Hanson a Moor.. Washington was the first under this constitution, but Not the first President of the USA.. That was for you Jack112... Also Columbus didn't discover America he was headed to China and stumble on the USA, besides how can you discover something when there were people already here?? The ONLY reason it's a holiday is because Pres. Roosevelt wanted the Italian vote!! SMH and that was for you TIM150.. SO THE NEXT TIME YOU STAND AND PLEDGE ALLEGIANCE TO THE FLAG.... REMEMBER.. "ONE NATION UNDER GOD, INDIVISIBLE WITH LIBERTY AND JUSTICE FOR ALL".. NOT SOME!!!!      
Oct 23, 2013 6:00AM
My credit union made me jump through 10 hoops, and then declined my FHA loan.  Do not use credit unions for mortgages.
Oct 23, 2013 5:56AM
you mean it is finally getting to were it should be    not qualifying the not qualified like they have been

Oct 23, 2013 5:55AM
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