Mortgage shoppers: One more reason to check your creditby Peter Miller
There’s been a big dispute of late regarding plans by the FHA to consider credit disputes when insuring mortgages. While it’s been widely reported that the FHA plan has been put on hold, it does raise the issue of what borrowers should do when faced with an unjustified claim regarding prior debts.
What the proposed rule said was that lenders need not worry when all disputed credit claims were worth less than $1,000 and at least two years old. What that also means is that FHA borrowers with recent credit disputes which total more than $1,000 could face the rejection of an FHA loan application.
According to HUD, “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.”
This is a case where credit disputes could not only impact mortgage rates, they could also doom loan applications as well as home sales.
The rule is part of the effort to strengthen underwriting standards and reduce future claims against the FHA and its reserve funds. Such conservatism is something widely favored by FHA critics, but this is a good example of a situation where good intentions produce bad results.
Check your credit (and check it often)
The problem concerns the matter of presumption. Credit reports contain mistakes and that’s why it makes sense to review credit reports with some frequency to assure that all items are correct and not outdated.
As an example, my wife and I received a bill from a debt collector explaining in great detail that we owed $150 for unpaid video rentals and purchases. The claim was ridiculous but one cannot ignore bill collector claims, otherwise such alleged debts can wind up on credit reports and influence mortgage rates.
So we checked around online. The result was that we sent a letter by certified mail with a return receipt requested explaining that the bill collector had no right to anything under the Fair Debt Collection Practices Act unless they could first document each rental and purchase and provide us with a signed copy of the original contract with the video store.
Two weeks later we got a second letter from the bill collector saying they would not pursue the matter.
Now let’s imagine that the dispute was about something other than videos and that the amount was bigger. Under the proposed FHA rule it’s possible that such an argument could derail a mortgage application. But, again, the problem with the rule is the presumption that any debt exists in the first place and that the borrower owes something.
For prospective mortgage borrowers, the FHA proposal should be seen as a requirement to straighten out credit issues before speaking with a loan officer. This should encourage you to check your credit reports on a regular basis, because in one form or another, outstanding debts are always an issue when seeking a new mortgage.