Realty Views By Terry Ross
September 24th, 2013 – One of the key pieces to the puzzle of getting the real estate housing industry back on track is the availability of financing, and the Federal Housing Administration (FHA) made some huge strides in that direction recently by issuing new regulations that take into consideration the plight of many Americans during the financial upheaval of the past few years.
Since the mortgage meltdown that began in 2008 and the subsequent retrenching of lenders from the days of low- or no-down loans, the FHA, with its government backing, has become the go-to player in the market when it comes to home mortgages that require generous underwriting guidelines and down payment requirements of less than 20 percent.
The announcement earlier this month that the FHA would change its rules regarding the waiting period for borrowers to qualify for an FHA loan following an event such as a foreclosure, short sale, deed-in-lieu or bankruptcy from three years to one year has been greeted by many in the real estate industry as one of the more popular government actions of late.
The types of extenuating circumstances that are important to the FHA in evaluating whether a borrower is qualified include “an economic event – defined as any occurrence beyond the borrower’s control that results in loss of employment, loss of income or both” that causes a 20 percent decline in household income for at least six months. If the borrower is now employed and paying credit accounts on time, they would then be considered eligible for a new FHA-insured loan. Those who have quit their jobs or have been fired for cause would not be eligible, and the agency will ask for documentation. Those who can demonstrate such a pay cut, job loss or decline in business income would also be required to obtain housing counseling from an agency approved by the U.S. Department of Housing and Urban Development.
Furthermore, the FHA is going to give a break to borrowers who may have been the victim of disputes with creditors that have blemished their records. In a move designed to more fairly treat borrowers whose credit reports contain collections actions and disputed debt accounts, the FHA has eased previous rules that would have led to large numbers of application rejections.
The old guidelines, which required payoffs of collections or disputed accounts totaling an aggregate $1,000 or more before applicants could go to close on an FHA loan, resulted in intense criticism from lenders and community groups. The regulators pointed out that many consumers have disputed accounts on their credit reports that were not caused by the consumers themselves, or for which they had legitimate reasons for not paying the account in full.
Medical bills frequently lead to disputes when charges for services performed exceed what was estimated up-front. Also, said critics, many disputed accounts — especially medical bills that are charged off and sold to collection agencies — end up as festering negative items on credit reports, even when the consumer had legitimate reasons for disputing the charges. In the new disputed account rules, to take effect October 15, all medical collection and charge-off accounts “do not require resolution” for applications to get approved.
The new rule requires that lenders document the reasons for approving a loan when the borrower has collection accounts in any amount. But if the total exceeds $2,000, the lender must undertake a “capacity analysis” designed to determine whether the borrower can handle any periodic payments that may be required to retire the debt.
Among the possible outcomes of a capacity analysis: The applicant might pay off the collection account, or make payment arrangements with the creditor. Generally, whatever scheduled payments are due under the arrangement must be reflected in the applicant’s debt-to-income ratio calculations.
Unlike the earlier guidelines, the new rule treats derogatory disputed accounts separately. If the aggregate amount of disputed items on the credit report is equal to or more than $1,000, the lender must now manually underwrite the application. If the total balances are less than $1,000, manual underwriting — which takes more time — is not required. Disputed medical accounts are excluded from the $1,000 limit and no documentation will be required. The same exclusion applies to disputed accounts where the problem was created by identity theft, credit card theft or unauthorized use.
Court-ordered judgments against borrowers that show up in their credit files are also treated differently: They’ve got to be paid off in full or there must be a written agreement detailing “regular and timely” payments to retire the debt, and documentation that at least three payments already have been made.
Considering the importance of getting as many borrowers into the market as is practical, and given the extraordinary circumstances of the past few years, it would appear that the FHA has made realistic and appropriate changes to the underwriting process of its loan programs, something that was much needed and something that could yield tangible, positive results.
(Terry Ross, the broker-owner of TR Properties, will answer any questions about today’s real estate market. E-mail questions to Realty Views at email@example.com or call 562/498-1049.)