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FHA Loan Rule Changes: Collections, Judgments and Payoffs

FHA loan rules are not set in stone, they are subject to change as new laws, new market conditions or other factors evolve. One set of recent changes to FHA mortgage loan rules has a direct effect on how some FHA loan applicants are approved–or disapproved–for FHA home loans.

According to FHA mortgagee letter 2012-3, there are important revisions to the instructions for FHA lenders found in HUD 4155.1 .4C.2.E. which formerly stated:

“FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.”

Potential FHA loan borrowers who have outstanding debts sent to a collection agency are directly affected by recent changes in that old rule. The new guidance is as follows:

“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.”

That is a very important change for anyone with an outstanding collection action on their credit record going into an FHA loan application. The new guidance does make provisions for borrowers who owe less than one thousand dollars as part of the collection action.

According to the new rules, “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.”

The new rules do not change the old requirement for court-ordered judgments. “FHA continues to require judgments to be paid off before the mortgage loan is eligible for FHA insurance”.

There is one exception mentioned in the new guidance, however. That exception applies if a borrower has already made an agreement with a creditor to make regular payments as part of the judgment, and can show proof, “that a minimum of three months payments have been made according to the agreement” .

Joe Wallace - Staff Writer

By Joe Wallace

March 2, 2012

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for for (8) years and is currently the Associate Editor for

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