WASHINGTON – June 19, 2012 – The Federal Housing Administration (FHA) told lenders on Friday that it would nix a rule that makes it more difficult for some borrowers to qualify for a mortgage.

FHA is trying to boost its reserves and lessen losses from mortgage defaults. As a result, it announced in March that it would limit loans to borrowers who had over $1,000 owed in a credit dispute. If a potential buyer had a $1,000-plus credit dispute on file, he or she had to either pay the debt or enter into a repayment agreement and make at least three months of on-time payments. The rule took effect April 1.

However, FHA backed off on the tight requirements shortly after the rule was implemented, adding a new caveat: Borrowers would be exempt from the new rule if their $1,000-plus credit amount is from a “life event” – a high medical bill, death, divorce or unemployment.

A few weeks later, FHA postponed the rule altogether in the face of industry criticism about the impact it would have on a still-fragile housing recovery. FHA said it would not be fully effective until July 1.

In a letter sent to lenders on Friday, FHA cancelled the rule altogether. FHA spokesperson Lemar Wooley says the agency is still accepting comments on the policy and expects to issue “new clearer language …very soon.”

“FHA killing off the rule is not a surprise when you take into account the resounding objection from the housing finance community, and their concern that this would overly constrain credit,” Edward Mills, senior vice president at FBR Capital Markets, told HousingWire.com. “This action shows how it can be incredibly difficult to make choices that move towards protecting the insurance fund over keeping mortgage credit available.”

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