FHA rescinded harsh credit restrictions for loan applicants

The FHA rescinded credit restrictions for loan applicants, which would have required them to resolve collections before a loan could be closed.

Tough, new credit restrictions, which had been scheduled to take effect last Sunday, were withdrawn by the Federal Housing Administration (FHA). As reported by the Los Angeles Times in a recent article, the policy change would have affected borrowers who have one or more collections or disputed-bill accounts on their national credit bureau files in which the aggregate amounts were $1,000 or more.

The rescinded plan would have required borrowers with collections or unpaid bills to "resolve" them before their loan could be closed. This was to be done by either paying them off in full or scheduling a series of repayments. If borrowers couldn't resolve an outstanding issue, they might not be able to receive FHA funding.

Critics of the proposed policy claimed that it gave lenders an unfair advantage and harmed FHA core borrowers' – first-time buyers, minority groups and low-to moderate-income families – chances of receiving a loan.

Clem Ziroli Jr., president of First Mortgage Corp. in Ontario, said that the FHA's long-standing policy of helping those types of groups has been undermined lately, with average credit scores of borrowers lately being higher than historical norms. A survey conducted by Ellie Mae showed that the average FICO score for an FHA-approved loan to buy a house in May was 713 on a scale from 300 to 850. This was a slight drop from March's average score, which was 724.

According to the article, during the past decade, FHA regularly financed borrowers with credit scores in the low to mid-600s. 

While it is important for as many individuals as possible to get a chance at owning a home, it is also important for lenders to invest in credit-worthy borrowers. As such, lenders would be wise to invest in either loan servicing or loan management software, to ensure that a proper plan is created that caters to individual borrowers and their needs.