HUD came out with three major changes this week for FHA loans when case numbers ordered April 1 2012 and afterward. This does not mean that the loan must be closed by April 1, 2012 but a contract must be executed and the FHA case number ordered through their system by that date. It is also important to note that a case number cannot be ordered until the contract is executed. Because April 1 is on a Sunday, technically this case number must be ordered by Friday March 30 at 5 PM.
Change #1- Increase in Upfront and Monthly MIP
The UFMIP will be increased from 1 percent to 1.75 percent of the base loan amount. This increase applies regardless of the amortization term or LTV ratio. FHA will continue to permit financing of this charge into the mortgage. Again, this change is effective for case numbers assigned on or after April 1, 2012. In addition, the monthly MIP will increase by .10.
This change will make a difference of $11.49 per month on an $100,000 sales price with 3.5% down, 30 year note. This would be equivalent to an increase in interest rate of approximately .25.
Change #2- Dispute Accounts Must be Paid if over Cumulative $1000
If the borrower has individual or multiple disputed credit accounts or collections with singular or cumulative balances equal to or greater than $1,000, the accounts must be resolved (e.g. payment arrangements with a minimum three months of verified payments made as agreed) or paid in full, prior to, or at the time of closing. The lender must obtain documentation supporting the payment arrangements or that the debt has been paid off. The payments arranged for the accounts must be included in the calculation of the borrower’s debt-to-income ratios.
Disputed credit accounts or collections resulting from identity theft, credit card theft, or unauthorized use, etc., will be excluded from the $1,000 limit under the terms shown below.
The mortgagee must provide in the case binder, a credit report or letter from the creditor, or other appropriate documentation, to support that the borrower filed an identity theft or police report to dispute the fraudulent charges. Mortgagees must provide documentation in the case binder to show all disputed or collection accounts are resolved, verified as not a debt to the borrower, arrangements made for payment, or paid in full.
Change #3- Collections Accounts Must be Paid if over Cumulative $1000
If the total outstanding balance of all collection accounts is equal to or greater than $1,000 the borrower must resolve the accounts (e.g. entered into payment arrangements with minimum three months verified payments- paid as agreed) or paid in full at the time of, or prior to closing. Mortgagees must document the case binder showing each account was resolved or paid in full.
If the total outstanding balance of all collection accounts is less than $1,000, the borrower is not required to pay off the collection accounts as a condition of mortgage approval.
FHA continues to require judgments to be paid off before the mortgage loan is eligible
for FHA insurance.
I would encourage you to revisit with any and all clients who are pre-qualified but not yet under contract to have their pre-qualifications updated. The last thing you or they need is to have their home buying experience derailed at closing due to a medical collection that, under the old rules was fine, but under the new rules is required to be resolved….prior to closing.