FHA Makes Home Loans Difficult for Consumers in Collections

Once upon a time, back when we were all younger and more innocent (2007), the story goes you could buy a house with just a made up job and absolutely no proof of income other than saying, “I sure don’t know what to do with all the gobs of money I make at my job in the Science Stuff for Business Center where I’m the CEO.”

That story, of course, doesn’t have a happy ending (for instance, the entirely made-up Science Stuff for Business Center went out of business do to “imaginariness”); and we’ve spent the past several years working through the repercussions.

A new wrinkle for potential home-buyers post-housing-bubble is this: “In a reversal of its previous policy, the Federal Housing Administration says it will no longer approve applications where the borrowers have outstanding collections or disputed accounts with an aggregate of $1,000 or more of unpaid bills,” according to a story running in the Daily Herald.

This is a 180-turn from past FHA oversight, where they’d take a case-by-base look at each borrower’s overall credit situation.

As of 1 April, a potential borrower’s delinquent account(s) will need to be paid off over a period of several months or, if the borrower is lucky enough to be flush with cash, entirely paid off at or before closing.

There are some exceptions: if the delinquent amount in collections is the result of identity theft, credit-card theft, or unauthorized use of the applicant’s credit, an exception can be made. Also, if the total is both less than $1,000 and are at least two years old.

Some mortgage banks are, unsurprisingly, not as excited about this policy change. Clem Ziroli Jr., president of First Mortgage Corp. in Covina, Calif., is quoted in the article: “35 percent of borrowers who’ve obtained FHA financing historically (would be) ineligible.” He goes on to suggest that FHA is turning its back on its primary mission: serving low- to moderate-income borrowers, a population that, historically, is no stranger to delinquent accounts in collections.

However, is it entirely beyond the pale to hope that, before taking on a significant debt burden — a couple hundred thousand dollars, for instance — a consumer has all of his other debts tidied up? And generalizations aren’t entirely without merit: wouldn’t you want to loan money to someone who has shown a history of paying that money back, rather than loaning money to someone who allows debts to rack up and go to collections?

And maybe most importantly: does everyone really need to own a home?