A new rule established by the Federal Housing Administration should give consumers another reason to pay their bills on time.
The FHA doesn't make home loans but insures mortgages that meet its guidelines.
Now the agency has changed its guidelines and will no longer approve applications for FHA backing of home loans in cases where borrowers have outstanding debt collections or disputed accounts totaling $1,000 or more.
Previously, $500 in disputed debt -- including debt in collections -- would trigger a review by a human underwriter, but the FHA left it up to lenders to approve or reject applications.
As a result, many lenders were adding restrictions and disqualifying borrowers, so the industry asked for clarification.
As a result, the FHA is requiring that the disputed debt be resolved by either the borrower paying off the debt or establishing a payment plan.
Disputed credit accounts or collections resulting from identity theft, credit card theft or unauthorized use will be excluded from the $1,000 limit if the lender provides supporting documentation.
Implementation of the rule, which was to take effect April 1, has been postponed until July 1, to give lenders more time to adapt their procedures, according to officials from the Department of Housing and Urban Development.
The FHA will also seek additional input on the rule and work on its clarification.
While the rule is aimed at reducing the FHA's risk in insuring home loans, it could prevent some borrowers from getting a loan.
"It's going to potentially damage credit scores," said Leticia Ramos, loan officer with Guild Mortgage in Dallas. "Once you reopen an old collection, it's going to drop the borrower's credit score, and it's going to affect that borrower's purchase, and it could hurt their interest rate as well."
If you have black marks on your credit report, you should pay off bills that you incurred and dispute any that aren't yours.
Don't give collectors a chance to come after you -- pay your bills on time.
"This rule makes so much sense," said John Ulzheimer, president of consumer education at SmartCredit.com. "The presence of collection accounts, whether they're $100 or $100,000, or anything in between -- that means elevated credit risk."
He acknowledges that it could shut out borrowers who previously would have gotten an FHA-backed loan.
"There are going to be people who in the past would have been able to get an FHA loan with an unpaid collection or a collection dispute who are now going to actually have to pay their obligation before they can take on another obligation," Ulzheimer said.
But he said: "That's not a bad thing. To saddle people and continue to pyramid debt on top of people is not healthy for a borrower."