Originally published May 2012. Updated October 2026 by Joel Lobb, Kentucky FHA mortgage broker (NMLS #57916).
In 2012, FHA released Mortgagee Letter 2012-3, which tightened the rules on self-employed income, disputed credit, collection accounts, judgments, and buying a home from a family member. Most of those rules have since been rewritten and are now in HUD’s single-family handbook, HUD 4000.1. If you are reading old advice online, it may be quoting the 2012 rules. Here is what changed and what applies to Kentucky FHA buyers today.
At a Glance: 2012 Rules vs. Today
| Topic | 2012 (Mortgagee Letter 2012-3) | Today (HUD 4000.1) |
|---|---|---|
| Collection accounts | $1,000 or more had to be paid or on a payment plan with 3 months of payments | Under $2,000 (non-medical): no action needed. $2,000 or more: pay off, payment plan in DTI, or 5% of the balance in DTI. Medical collections excluded. |
| Disputed accounts | $1,000 or more had to be resolved or paid before closing | Disputed derogatory accounts of $1,000 or more send the loan to manual underwriting. They do not automatically have to be paid. |
| Court-ordered judgments | Pay off, or a payment agreement with 3 months of verified payments | Essentially the same: pay off, or a written agreement with at least 3 months of on-time payments, counted in DTI |
| Self-employed income | P&L and balance sheet if more than a calendar quarter had passed since the last tax return | Still required when more than a calendar quarter has passed since the end of the last tax year. Declining income gets extra scrutiny. |
| Buying from family | “Family member” definition expanded | Broad family definition still applies. Family-member purchases of a principal residence can qualify for full FHA financing. |
Collection Accounts: From $1,000 to $2,000
The 2012 letter required borrowers with $1,000 or more in collections to pay them off or set up a payment plan before closing. FHA later replaced that rule. Today, if your non-medical collections total less than $2,000, they do not have to be paid. At $2,000 or more, the lender pays them off, counts your payment plan in your DTI, or counts 5% of the balance as a monthly payment.
For the full breakdown with examples, read Does FHA Require Collections to Be Paid Off? Kentucky FHA Collection Rules (2026).
Disputed Accounts: Now a Manual Underwriting Trigger
Under the 2012 rule, disputed accounts of $1,000 or more had to be resolved or paid. Today, disputed derogatory accounts that total $1,000 or more mean an automated approval must be downgraded to a manual underwrite. These do not count toward the $1,000:
- Disputed medical accounts
- Accounts with a zero balance
- Accounts with no activity in the last 24 months
- Accounts disputed because of identity theft or unauthorized use, documented with a police report or creditor letter
Manual underwriting is not a denial, but it comes with tighter DTI limits and more documentation. If you are planning to buy, talk to your loan officer before disputing anything on your credit report. See Kentucky FHA Manual Underwriting Guidelines.
Court-Ordered Judgments
This rule has held up since 2012. A judgment must be paid off before or at closing, or you need a written agreement with the creditor and proof of at least three months of on-time payments. You cannot prepay the three months, and the payment is included in your DTI.
Self-Employed Borrowers
FHA still wants two years of personal and business tax returns from most self-employed borrowers. If more than a calendar quarter has passed since the end of your last tax year, the lender also needs a year-to-date profit and loss statement and balance sheet. If your self-employment income has dropped significantly, expect the underwriter to look harder at it, and a large decline can send the loan to manual underwriting. Read more in Kentucky FHA Work History and Income Requirements.
Buying a Home From a Family Member
An “identity of interest” sale is one between parties with a family or business relationship. For FHA purposes, a family member includes a child, parent, or grandparent; a spouse or domestic partner; a legally adopted son or daughter; a foster child; a brother, stepbrother, sister, or stepsister; an uncle or aunt; and in-laws.
Identity-of-interest purchases are generally limited to 85% loan-to-value, but there is an important exception: if you are buying a family member’s home as your principal residence, you can still use full FHA financing with 3.5% down. A family member can also give you gift equity toward your down payment.
Related Kentucky FHA Guides
- 2026 FHA Loan Requirements in Kentucky Explained
- Kentucky FHA Loan Credit Score Requirements
- Kentucky FHA Loan Limits
Questions About Your Credit or Income?
FHA rules change, and lenders can add their own stricter requirements. If you have collections, disputes, a judgment, or self-employment income, send me a message and I’ll tell you where you stand before you apply.
Joel Lobb
Mortgage Broker – FHA, VA, USDA, KHC
EVO Mortgage
10602 Timberwood Circle, Suite 3, Louisville, KY 40223
Call/Text: (502) 905-3708
Email: kentuckyloan@gmail.com
NMLS #57916 | Company NMLS #1738461
Source: HUD Handbook 4000.1; FHA Mortgagee Letter 2012-3 (historical). This is not a commitment to lend. All loans are subject to credit approval, underwriting guidelines, and lender requirements, which may change. Equal Housing Lender. Licensed in Kentucky only. Not affiliated with HUD, FHA, or any government agency.
