This is a significant tightening for the FHA; previously there was no requirement that disputed credit account be paid off--before this rule a direct endorsement underwriter could determine if any of the borrower's debts should have an impact on the FHA's approval.
Now a borrower must either pay off the outstanding balance or document a payment arrangement that the lender must submit to the FHA before closing. The payment arrangement will be counted into the debt-to-income ratio for the new home loan.
The rule excludes disputed accounts from more than two years ago, along with those related to theft. But the lender must document an identity theft or a police report on the fraudulent charges.
The unintended consequences could be severe for those in the pipeline--kicking out many buyers, perhaps as many as 50%. Bottom line, borrowers must clean up their credit reports before applying.
