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FHA: No loan if you have a collection

By Polyana da Costa ·
Monday, April 2, 2012
Posted: 8 am ET

The FHA is tightening the screws on borrowers again.

Borrowers will be rejected for an FHA mortgage if they have an account over $1,000 in dispute or collection. The new rule went into effect April 1.

If the disputed debt is more than 2 years old, borrowers won't have a problem securing an FHA mortgage. But unpaid collections over $1,000, including charged-off accounts, will need to be paid in full before the loan is approved. The FHA will approve the loan if the borrower enters into a repayment agreement and the borrower has made three payments. The agreed payment will be figured into the debt-to-income ratio, which compares monthly debt obligations to income.

The new rule does not apply to debt resulting from identity theft.

Many homebuyers rely on FHA mortgages because the FHA allows small down payments. Requiring these borrowers to pay off charged-off debt or disputed accounts would likely eat up these borrowers' down payments and savings, which would prevent them from buying.

To add to the tighter guidelines, the FHA will make FHA loans more expensive, starting April 9.

The upfront mortgage insurance fee, which borrowers pay when they take out FHA loans, will rise from 1 percent of the total loan balance to 1.75 percent. And the annual mortgage insurance premium, which the borrower pays monthly on FHA loans, will rise from 1.15 percent to 1.25 percent of the loan balance.

The FHA may implement additional hikes in the near future.

Is it even worth getting an FHA mortgage these days?

Short answer: No, unless you don’t have another option. If you have decent credit and at least 5 percent for a down payment, you're probably better off with a conventional loan with private mortgage insurance.

A borrower who takes out a $170,000 mortgage would save about $70 per month in mortgage insurance premium if the borrower got a conventional mortgage instead of an FHA loan, according to an analysis by private mortgage insurer Genworth Financial Mortgage Insurance. Borrowers who take out conventional mortgages also don’t have to pay the upfront fee, which would be $2,975 on a $170,000 mortgage.

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