The latest development in the ongoing real estate and finance saga is new, tighter regulations for FHA loans. Will these tighter standards force more consumers to consider residential hard money lenders to fund their real estate purchase?

While the regulations may impact some consumers who could end up turning to hard money as an alternative source of funding, the reality is that the vast majority of those impacted would not be able to qualify for a hard money loan. Yes, that’s right, I’m saying that the borrowers who cannot qualify for an FHA loan based on these new regulations are borrowers, for the most part, who would not qualify for a hard money loan.

Most of those impacted by this regulation are those putting 3.5% down on a home. So they are being financed 96.5% of the purchase price. At that level, the FHA wants to ensure that all their debt is accounted for. Makes sense, especially since the high loan to value loans are typically the most risky. Here’s an overview of the regulations from CNN Money:

Starting April 1, borrowers in ongoing disputes with creditors over debts of $1,000 or more may no longer qualify for FHA-insured loans. Even borrowers with perfect credit scores can be denied over a single $1,000 problem charge.

The change is part of the agency’s effort to reduce its risk as it grapples with a depleted reserve fund that has fallen below legally-mandated levels. The FHA insures mortgages which are originated by private lenders. To help bolster its capital reserves, FHA will also hike the insurance premiums it charges borrowers beginning in April.

The new rule requires borrowers with loans in collection that add up to at least $1,000 to either pay off the debt, prove they’re making payments on the disputed loans or explain why the disputed loan is somehow wrong — and document their case — before they can close on a FHA loan.

Disputed accounts going back more than two years, along with those related to fraud or identity theft, will not count against borrowers, according to the FHA, but lenders must get evidence, such as police reports, that document client claims of identity thefts or fraud charges

(Read the full article here)

So basically they are saying that if you want to buy a home and put only 3.5% down, you have to take care of outstanding issues on your credit report. It makes sense to me. Although this has the potential to slow the housing market some if many borrowers cannot qualify for an FHA loan, it is a risk reduction tactic that can help ensure borrowers are able to meet their housing obligations.

To come back to our original point of these turn down borrowers not being able to qualify for a loan from residential hard money lenders. The reason this is true is not due to the credit, but due to the down payment requirement. While FHA and other conventional loans require credit worthiness to mitigate risk, hard money lenders require equity to mitigate risk. On a residential purchase, a borrower really needs to put down at a bare minimum 30% to obtain a hard money loan. That is unrealistic to many would be home buyers.