Home > Mortgages > Want an FHA Loan? Resolve Bad Debts First.

Comments 1 Comment

The Federal Housing Administration (FHA) recently announced a policy change in how they will treat mortgage loan applications for those whose credit histories contain unpaid collection accounts. The changes will prevent individuals with outstanding unpaid collection account balances—whether from credit cards, medical bills or other debts when the combined outstanding balances total $1,000.00 or more—from getting a mortgage. For those who haven’t been able to keep bills paid up to date, this means that resolving past due accounts is becoming increasingly important. The rule was originally scheduled to go into effect April 1, but it has been delayed until July 1.

With the new rule, the bad debts have to be paid for several months or be fully resolved prior to closing an FHA home loan. If the debts are disputed as related to identity theft or unauthorized use of an account, or if collection items total less than $1,000 and are a minimum of two years old, the new rule may be waived. If your personal financial hardship was the result of a death, job loss, or divorce you may be able to document the issues to the lender in support of a waiver, according to a policy clarification issued by the FHA.

[Credit Calculator: Use Credit.com’s Free Credit Report Card]


Credit.com’s Credit Report Card
Check your credit bureau profile for free with this great tool. See your detailed credit evaluation, expert advice on managing your credit, and unlimited free updates every 14 days.
Get Started Here »

This new rule should not surprise anyone paying attention to the mortgage market. Loose mortgage loan underwriting standards were one of the contributing factors that led to the implosion of the housing market. A tightening up on loan approval and quality standards is certainly a rational response. The result is, however, that the new FHA policy treatment will likely prevent more would-be home buyers from qualifying for an FHA loan, which is often a better priced loan product, especially for first time home buyers.

While this change in rules is designed to improve mortgage loan quality, some have estimated that this new policy will lock a good 35% of people in certain hard hit local economies out of the home-buying market. This can easily be the case when, as reported earlier this year, data from 2011 showed that roughly 1 in 7 Americans are dealing with collections related to one or more bills they were unable to pay on time. Also consider that over 250 billion dollars of student loan debt is currently in default. According to Fitch Ratings: as many as 27% of all student loan borrowers are more than 30 days past due.

Depending on how hard someone is hit with financial setbacks, and how long it takes to pick yourself up and dust off the debt, you eventually must make progress and improvements to your credit reports.

[Related Articles: Read more on how to deal with debt]

Here are three options to consider for dealing with bad debts:

  • One year participation in a debt management plan traditionally offered by Consumer Credit Counseling Services is a minimum standard used by the FHA to show that you are serious about resolving your financial obligations.
  • Negotiating and settling old balances for less than what is owed as satisfaction of the debt and fully documenting each transaction may provide a more rapid and less costly method for resolving collection entries on your credit report. Be sure to fully document each settlement in case your credit reports are not properly updated.
  • Filing for chapter 7 bankruptcy where your unsecured debts are typically discharged can provide the type of financial fresh start you need. Just know that to qualify for an FHA loan (as well as others), your bankruptcy must be discharged for at least two years.

[Featured Products: Research and Compare Mortgage Rates at Credit.com]

Rebuilding Your Credit »

Image: David Sawyer, via Flickr.com

Pages: 1 2

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team