The U.S. Department of Housing and Urban Development (“HUD”) issued guidance on August 15 requiring lenders to consider potential borrowers’ debt in collection and credit disputes before the Federal Housing Administration (“FHA”) will insure a mortgage. According to the guidance published in HUD Mortgagee Letter No. 2013-24, collections and judgments may indicate a borrower’s disregard for credit obligations and must be considered in the creditworthiness analysis.

Nutter Notes: The FHA does not require debts in collection to be paid off as a condition of mortgage approval. According to the guidance, the FHA will require lenders to conduct a capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000 to mitigate the risk that collection efforts for unpaid debts could affect the borrower’s ability to repay the mortgage. The guidance becomes effective on October 15 for all FHA programs other than non-credit qualifying streamline refinances and the Home Equity Conversion Mortgage.