Thinking about buying a home using an FHA Loan? Make sure you can qualify before spinning your wheels.
In today’s real estate market, many people are going to 3.5% down payment FHA loans. Many buyers do not have enough cash to put down the 20% needed for a conventional loan, so they are deferring to FHA loans. These loans have been helping to produce the few non-investor buyers in this stagnant market.
As of April 1 (and unfortunately, this is not an April Fools joke), FHA will no longer insure loans to borrowers who are in ongoing disputes with a creditor for more than $1,000. This means that no matter how great a borrower’s credit score, if there is a credit dispute for more than $1,000, they will be denied an FHA loan.
Before this change, the loan originator made the decision whether or not to issue the loan in situations described above. Now the lender cannot override this denial.
Why is this happening now? The FHA has a reserve fund that serves as the backstop for FHA loans. This reserve is legally mandated to be kept at certain levels to ensure they can cover any defaults. Right now, the reserve fund is below these levels so the FHA must therefore reduce its risk and exposure as much as possible.
What should you do if this applies to you?
- Establish when the dispute occurred. If the dispute is more than two years old, it will not affect you. Have documentation to prove this.
- Establish how the dispute occurred. If it’s because of fraud or identity theft, it will not affect you. Prove that this was the reason for the dispute.
- If the debt is valid, you must pay it off, or establish a payment plan. You must prove that it’s been paid off or that payments are being made.
Talk to a loan officer for more information about what you should do if you are affected by this recent change.
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