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New FHA Collections Rule Almost Killed Two Of My Short Sales

New FHA Collections RuleTwo weeks ago, we received buyer contracts for two of our short sales – each FHA buyers.  While both had credit histories that would qualify them for a FHA loan – both had over $1000 in disputed collections, one was just $1,200.

As neither had locked in their loans or an established a “loan case number”, under the new rule, that would have disqualified them both effective April 1st.  Luckily, we were able to secure their loans through their lender and ours in time.

Now it appears that we had a little more time.

The Federal Housing Administration (FHA) rescinded and will delay a rule that as of April 1 prohibited borrowers with more than $1,000 in disputed collections accounts from getting a federally backed mortgage, according to a notice sent late Friday.

FHA postponed the rule until July, and will take public comment from lenders, builders and others in the industry until then to clarify guidance. “There is clearly a bigger ripple effect here than the Department of Housing and Urban Development might have anticipated going into this revision,” said Lisa Jackson, senior vice president of research and business development with John Burns Real Estate Consulting. “Any measure that impacts even 10% of sales is meaningful and our analysis shows it would be far greater in some markets.”

The FHA attempted to ease the original proposal, allowing borrowers to provide written documentation on “life event” disputed accounts with them, such as bills stemming from illness, divorce or unemployment in order to obtain an exemption. Borrowers could previously show the lender they arranged a payment plan to settle other accounts too in order to qualify, including credit card and utility bills.

According to the alert sent Friday, the FHA ensured lenders they would not be in violation of the new rule for loans written between April 1 and April 8. Until July, the old guidance will be put back into place.

Analysts from JPMorgan Chase said the rule would affect many first-time homebuyers the most, those most likely to carry such debt. The analysts estimated the rule could cut FHA demand by up to 20%, and the damage would affect homebuilders differently depending upon how much of their business hinged on these borrowers.

The FHA previously said it adopted the rule in order to reduce default risk for newer books of business. Mortgages written during the housing bubble continue to haunt the agency.

Whether FHA will permanently rescind this rule is yet to be seen.  If not, we will undoubtedly see additional pressure on homebuyers, particularly 1st time homebuyers, in obtaining real estate financing.


Short Sale SpecialistsThe Trademark Loss Mitigation team is a family owned business and  includes a multi-state network of real estate agents, attorneys, title companies, short sale negotiators, credit repair providers, mortgage providers, inspectors and investors. Together, those professionals act as a NO COST short sale outsourcing solution for Realtors and Homeowners.

Jim McNinch, Certified Distressed Property Expert (CDPE);
Short sale agent, Short sale specialist

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