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 Christine DiGangi, Credit.com
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.
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.com 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."
More from Credit.com
- Why you should check your credit before buying a home
- How to get pre-approved for a home loan
- How to search for your next home
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!
People. If you own property......and wish to sale........sale it owner carry. If you are a buyer? Look for owner carry property for sale. KEEP THE BANKS OUT OF YOUR PROPERTY AND LIFE.
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.
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.