The Federal Housing Administration (FHA) on Thursday announced that it has issued a waiver to a requirement that FHA-approved lenders flag rejected loans in the FHA Connection (FHAC) system, an effort the agency says will improve access to government-insured mortgage financing for qualified borrowers.

“FHA has determined that this flag does not improve risk management and is often why other lenders will reject an applicant even when that applicant might otherwise qualify for a loan,” the agency explained in an informational notice distributed on Thursday. “Currently, when a mortgagee rejects a borrower’s application for an FHA-insured mortgage, the denial information must be entered on the Mortgage Credit Reject (MCR) screen in FHAC.”

The resulting warning flag would become associated with both the individual borrower and their case number for six months, ultimately requiring a review from the regional Homeownership Center (HOC) when a borrower applies for a government-insured loan from another lender during that period.

“By waiving this provision of the Single Family Housing Policy Handbook 4000.1, FHA will no longer require lenders to enter rejection information in FHAC, streamlining the loan underwriting process and removing an unnecessary barrier for borrowers who wish to obtain FHA-insured financing,” FHA said.

The waiver is effective for all cases pending endorsement on or after September 11, 2023. Any cases pending endorsement that have the aforementioned flag will see those removed at that time, FHA said. The MCR screen itself will also no longer be available in FHAC beginning on that day.

The waiver is also a new permanent policy change. It will be incorporated into future versions of the Single Family Housing 4000.1 Handbook, according to the agency.