FHA Updates Guidelines on Collections and Disputed Accounts

FHA recently released revised guidelines regarding Collection Accounts and Disputed Accounts. These new requirements may make it more difficult for some Ohio FHA homebuyers and homeowners that are seeking an FHA mortgage. However, it appears the main impact will be on debt-to-income ratio. Borrowers that have a higher than ideal debt to income ratio will be impacted by the updated guidance from FHA.

Mortgagee Letter 13-24 and Mortgagee Letter 13-25 are both effective for all Ohio FHA Case Numbers assigned on or after October 15, 2013.

Here is a brief overview of the new procedures for both Collection and Disputed accounts.

Ohio FHA – Updated Collection Account Guidelines

If the total balance of all collections are less than $2,000 – lender is not required to consider or evaluate the collection accounts

If the total balance of all collection accounts is greater than $2,000 – lender must include monthly payments in the borrower’s debt-to-income ratio unless the collections will be paid prior to closing

Medical collections are excluded from the guidelines above.

The amount used for the monthly payment would be determined by either:

Borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required, or

If evidence of payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection.

Ohio FHA – Updated Disputed Account Guidelines

If the total balance of all disputed derogatory credit accounts is less than $1,000 – lender can use the FHA Automated Approval

If the total balance of all disputed derogatory credit accounts is more than $1,000 – lender must downgrade the FHA Automated Approval to a manual underwrite.

Disputed Medical accounts are excluded from the $1,000 limit and do not require documentation. Also, non-derogatory disputed accounts are excluded from the $1,000 limit.

As I have noted many times here at Ohio FHA, the guidance above is the minimum required by HUD to endorse an FHA mortgage. Many lenders impose stricter guidelines. Click to get today’s FHA mortgage rates.