Underwriting and policy changes are common occurrences in mortgage lending. Fannie Mae, Freddie Mac, and FHA/VA usually dictate what the rest of the industry does and the changes affect everyone.
HUD sent out a memo with new changes to some FHA underwriting policies February 28, 2o12. Most of the changes were to take affect on April 1, 2012 with the new case numbers. Then after issuing the new policy, they decided to reverse the policy and wait until at least July 2012 before implementing the changes.
The FHA's new collections policy states that the FHA will not insure FHA mortgages for borrowers whose credit reports show outstanding collections is excess of $1,000 until either (1) The borrower pays the bills current, or (2) Establishes a satisfactory payment plan. The rule had been that FHA didn't require those debts to be paid but did want an explanation for the collections. It was really underwriter discretion if something needed to be paid prior to closing. Any collections that were court ordered were required to be paid in full prior to closing. So after issuing the letter that was effective for April, it has been postponed to July and may change again before that date.
However, if you know you are going to be buying a home in the future and you know you have collections, you may want to start the process now to get those collections paid or at least set up a payment arrangement to get the collection satisfied. If you set up payment arrangements, you need to make a minimum of 3 months of on-time payments before closing. It would be a good time to meet with a loan officer and decide what needs to be done prior to buying a home so you are ready when the time is right.
FHA will consider a borrower's circumstance via a written explanation when considering disputed collections accounts. If one of the disputed accounts in question stems from a medical bill, death, divorce, or loss of employment -- collectively known as "life events" -- and the borrower can document the situation, the FHA mortgage may still be approvable. This will be up to an underwriter and it will depend on the documentation provided.
A revision is expected to be formalized by July 1, and HUD is open for comments. Until then, the previous collection policy remains in place.
