FHA has pulled back on new qualifying changes that would make it a little harder for some borrowers applying for a home mortgage after April 1st, 2012.
Changes to FHA qualifying guidelines would have required that any collections or charge offs totaling more than $1,000 be paid off or have made arrangements and payments toward resolving these accounts.
There are some serious problems with this.
Payment Arrangement Problems
Waking a sleeping dog. If there are collections or charge offs on your credit report, that’s typically the result of challenges in your past.
One way that credit bureaus calculate your FICO score is by discounting the impact a credit event has on your score based on the last reported age of the event (ie..collection, charge off).
As a lender, we see the impact of this all the time. If you pay wake up and old collection or charge off account, it can report as a current delinquent on your credit report. It doesn’t matter that you’re now paying it, the only thing the scoring models see is that there is current activity on a collection account. Not good for credit scores.
Collection or Charge Off Not Your Fault
Not all collections are justified or reported accurately.
Sometimes you have joint accounts with ex-significant others and the responsibility to pay was not even yours.
Many times I will encounter a credit report with medical collections that were supposed to be covered by insurance.
What about unexpected life events?
If you get laid off from your job, the company you work for goes out of business, you have a medical emergency that is results in excessive hospital bills?
It seems I’m not the only one that is asking these questions.
Last week, FHA back peddled on the original proposal, allowing borrowers to provide written documentation on “life event” disputed accounts with them, such as bills stemming from illness, divorce or unemployment in order to obtain an exemption.
This week, FHA announced that it is rescinding the April 1st, 2012 implementation date of this poorly thought out collections rule.
So, for now, past collections and charge offs will not affect your ability to qualify for a FHA home mortgage. If you have collections or charge offs and this collection rule “would have” affected you, it might be a good idea to get started on the approval process now and avoid any surprises in the future.