Collection accounts are creditors who have not been paid by the debtors and have assigned the account to either their collection department and/or an outside third party collection agency. A mortgage loan applicant can still get a residential mortgage loan with open unsatisfied collection accounts. You do not have to pay off a collection account with a credit balance in order for you to get a residential mortgage loan approval. However, mortgage lenders classify collection accounts into two categories. Non-medical collections and medical collections. Effective 2014, the Federal Housing Administration, FHA, has implemented new mortgage lending guidelines on non-medical collections and on medical collections. Medical collections are treated differently than non-medical collection account in the mortgage underwriting guidelines for 2014.
Non-Medical Collection Accounts
Non-medical collection accounts are any unpaid, unsatisfied collection accounts that are not medical. For example, unsecured credit card collections, automobile repossessions, installment debt collections, utility collection accounts, and any other creditors or collection agencies that do not represent a medical industry is classified as non-medical collections. Non-medical collection accounts with a credit balance does not have to be paid to get a mortgage loan approval. However, effective 2014, if there is a balance on a unsatisfied non-medical collection account, a 5% of the balance of the unpaid collection account will be used as a monthly expense and be counted towards the mortgage loan applicants debt to income ratios.
Does Unpaid Collection Accounts Need To Be Paid?
The collection account does not have to be paid nor does any payment needs to be made on a monthly basis, however, the 5% calculation will be used. Many of those mortgage loan applicants with large unpaid collection accounts can have an issue to this rule. However, if you are one of those mortgage loan applicants with large outstanding balances on your collection accounts, mortgage lending guidelines will accept a payment agreement with the collection agency. For example, if you have an outstanding balance on a collection account of $20,000, 5% of the unpaid $20,000 will be used towards your debt to income calculations or $1,000. A $1,000 monthly payment is equivalent to a $200,000 mortgage and will greatly impact a mortgage loan applicant’s debt to income ratios. However, if you set up a payment agreement with the collection agency that you promise to pay $100 per month versus the $1,000 per month, the $100 per month per your payment agreement will be used towards your debt to income calculations.
Medical collections are treated more favorably and differently per 2014 mortgage lending guidelines. You can have unpaid collections with credit balances with medical collections and no percentage of the unpaid collection balance will be taken into account in calculating your debt to income ratios like it is the case with non-medical collections. On the above example where you have a $20,000 unsatisfied unpaid collection account, if that balance is a medical collection, a mortgage underwriter will not take 5% of the unpaid balance in calculating your debt to income ratios. No percentage of the unpaid collection balance will be used towards calculating your debt to income ratios.
Disputing Derogatory Credit Items On Your Credit Report
Many consumers either hire a credit repair company and/or try to remove derogatory items by themselves by disputing derogatory credit items. 2014 mortgage lending guidelines on disputing derogatory credit items are now in full force. You cannot have an active pending credit item dispute on a non-medical collection account with a credit balance over $1,000. If you do have an active credit dispute on your credit report, your mortgage application process will come to an abrupt halt until you retract the disputed items with the unpaid balances. Again, these are for non-medical collections.
Credit Disputes During Mortgage Process
To proceed with the mortgage application process, you need to either pay off the disputed items or retract your dispute with the three major credit reporting agencies and/or the disputed creditor and/or collection agency. Unfortunately, if you retract your dispute on your credit report, your credit scores will most likely drop. Anytime you retract a dispute, your credit scores will drop. Sometimes the credit scores can drop as much as 100 FICO points depending on your situation. Charge off disputes and/or disputes with no credit balances are fine and do not need to be retracted.
The above case does not apply for medical disputes. You can have disputes on medical collections with open collections and this rule does not apply.
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