FHA delays loan rule on borrower credit disputes

After being criticized that a new rule could shut out too many borrowers, the Federal Housing Administration says it will postpone implementing the rule, which would make it tougher for borrowers with credit disputes on their records to qualify for an FHA-backed mortgage.

The new rule took effect April 1, but after the first week of rolling it out, FHA announced it has decided to postpone the rule until July 1. Any mortgages written while the rule was in effect during that first week in April will no longer see the new rule applied.

The new guideline issued by FHA will require borrowers wanting to qualify for an FHA-insured mortgage to pay off any credit dispute in their history of more than $1,000 or set up a documented payment plan on any unpaid collection accounts.

The delay in the new rule taking effect, according to FHA, will provide lenders more time to adjust to the new requirements as well as the opportunity to solicit “additional input on this section and work to clarify guidance, as appropriate.”

The FHA received several complaints from lenders that the new rule would shut too many buyers out from qualifying for a mortgage. For example, JPMorgan Chase analysts had estimated the rule could curtail demand by up to 20 percent for FHA loans.

The new rule is expected to have the greatest impact on young, first-time borrowers, Jeremy Radack, a real estate attorney, told Builder Magazine. When the FHA rule did temporarily take effect in the first week of April, Radack says they saw a decrease in sales up to 35 percent.

FHA has clarified its new rule since first announcing it in late February, saying that collection accounts “resulting from life events such as medical, death, divorce, loss of employment, etc.,” could be exempted from the $1,000 limit with a written explanation.