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FHA eases new rule on collections accounts

The Federal Housing Administration will allow borrowers to provide a written explanation of some disputed collections accounts in order to qualify for a government-backed mortgage, according to a rule clarification sent to lenders.

Under a new rule that took effect April 1, the FHA will disqualify borrowers from a home loan until any outstanding collections accounts of more than $1,000 are resolved or a payment plan is set up.

Because borrowers with a sub-700 credit score can often have such overhanging accounts, lenders feared the rule would shut out far too many homebuyers.

But according to the alert, a borrower can be exempted from the rule if the disputed collections account stems from a “life event,” such as a medical bill, death, divorce or loss of employment.

“The borrower may provide a written explanation and documentation as it applies to all types of disputed and collections accounts if it makes sense, and is consistent with other credit information in the file,” according to the alert.

The FHA originally installed the rule to protect its mutual mortgage insurance fund from insolvency. Its capital ratio dropped to roughly 0.2% last year and may have needed an unprecedented bailout without recent settlements with originators and increases to its insurance premiums.

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