According to a story in the Washington Post, the Federal Housing Administration has changed its approval procedure, barring loans to applicants whose credit reports show a combined total of $1,000 or more in collections or in disputed accounts. FHA loans have traditionally been a vehicle for lower or middle income families to purchase a home. The new rule, which took effect April 1, will likely disenfranchise those who the FHA should be serving.
The Post story quoted two mortgage lenders, one of whom said, “35 percent of borrowers who’ve obtained FHA financing historically [would be] ineligible.” Another said that an applicant had a high credit score, but then discovered that medical bills erroneously appeared on his credit report, causing his FICO score to plummet to 655. That would make him ineligible for an FHA loan.
The FHA rule says that credit report items don’t count if the amounts total less than $1,000 and are at least two years old, or if they’re caused by identity theft, credit card theft, or unauthorized use of credit. Still, the FHA should realize that debt collection agencies often submit negative information to credit reporting agencies about bills that have been paid off, that have been disputed, or that belong to someone else.
The takeaway here is to stay on top of your credit reports, and utilize the federally-mandated annual free credit report offered by Experian, TransUnion, and Equifax. You can obtain them from www.annualcreditreport.com.