The FHA has decided to do away with a rule that would have created a closing delay of 3 months or more if an FHA borrower had debt totaling or exceeding $1,000. Now, the FHA “credit-dispute†rule has been withdrawn, according to an agency letter released Friday.
A HUD spokesperson said in an email that the decision to rescind the earlier proposal, which was first announced in February, was based on input received.
“We plan to issue a new [Mortgagee Letter] shortly which will be more clear in our effort to manage risk on this issue without the unintended consequence of denying mortgage financing to otherwise qualified borrowers,†the spokesperson said.
According to the old guidance, which is the current rule, “[i]f the credit report reveals that the borrower is disputing any credit accounts or public records, the mortgage application must be referred to a [direct endorsement] underwriter for review.†In other words, an FHA spokesperson explained it will “get a human eyeball†to more fully understand what is going on.
The proposed policy that has been rescinded as of Friday would have required a borrower to either cure the collections debt before closing or resolve the debt through a repayment plan, which would have to be maintained for a minimum of three months before closing.
The proposal was originally introduced to lower credit default.
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