2016 FHA Collections Guidelines Update

2016 FHA Collections Guidelines For Home Buyers

2016 FHA Collection Guidelines for mortgage loan borrowers were just released. FHA does not require FHA mortgage loan borrower’s to pay off outstanding collection accounts to qualify for FHA Loans. Many home buyers are told by mortgage lenders that they do not qualify for a FHA Loan due to outstanding collection accounts, but that is not because of FHA Collections Guidelines but it is due to the individual mortgage lender overlays . Banks and mortgage lenders can have their own set of lending guidelines that are on top of the FHA Collections Guidelines where even though FHA does not require outstanding collection accounts to be paid off, the individual bank or mortgage company you go to may require that all outstanding collection accounts be paid in full before they can qualify you. If you are told that you do not qualify for a FHA Loan by a bank or mortgage company due to having outstanding unpaid collection accounts, please contact me at 262-716-8151 or email me at gcho@gustancho.com. I do not have any FHA Lender Overlays on outstanding collection account and will just go off the minimum FHA mortgage lending guidelines .  Many of my borrowers have unpaid outstanding collection accounts and we have no issues in qualifying and closing on their FHA home loans. On this article, we will be discussing the 2016 FHA Collection Guidelines and how mortgage underwriters classify the various types of collection accounts and how you can qualify for a FHA Loan with unpaid outstanding collection accounts.

2016 FHA Collections Guidelines: Classification On Collection Accounts

2016 FHA Collections Guidelines classifies collection accounts into four categories:

  1. Medical Collection Accounts
  2. Non-Medical Collection Accounts
  3. Non-Mortgage Charge Off Accounts
  4. Mortgage Charge Off Accounts

As mentioned earlier, 2016 FHA Collections Guidelines does not require borrowers to pay off unpaid outstanding collection accounts to qualify for FHA Loans. With unpaid outstanding medical collection accounts, debt to income ratios are excluded and the FHA mortgage underwriter can ignore medical collection accounts with unpaid outstanding medical collection account balances no matter how much the unpaid outstanding medical collection account balance is. However, with non-medical unpaid outstanding collection accounts with balances of greater than $2,000 ( the sum of all non-medical collection accounts with balances ), FHA requires that 5% of the outstanding unpaid non-medical collection account balances be used to calculate the borrower’s debt to income ratio  .  Let’s take a case scenario where a FHA mortgage borrower has $10,000 in unpaid outstanding non-medical collection account balance on all of their collection accounts. FHA requires that the mortgage underwriter take 5% of the $10,000 in unpaid collection balance, or $500 per month, and use that as a monthly debt obligation even though the FHA borrower does not have to make any payments to the collection agencies and/or creditors. You cannot have credit disputes on non-medical collection accounts with unpaid balances of over $1,000 ( total outstanding collection account balances on your credit report ). You are allowed to have credit disputes on non-medical collection accounts with zero balances.

The third category on collection accounts is non-mortgage charge off accounts. FHA ignores charge off accounts and treats charge off accounts like medical collection accounts and FHA borrowers do not have to pay off charge off accounts no matter what the unpaid outstanding collection account balance is. You cannot have credit dispute on any charged off collection accounts. All credit disputes on charged off accounts needs to be removed before you can proceed with the mortgage process .

The fourth and final category on collection accounts are mortgage charge off accounts. This applies for first and second mortgage charge off accounts. FHA does not require you to pay off mortgage charge off accounts and FHA ignores mortgage charge off accounts. However, there is a three year waiting period to qualify for a FHA Loan after a mortgage charge off account. This applies for first and second mortgages.

Charge Off Accounts With Balances

I get so many borrowers who come to me because they were told that they do not qualify by banks and/or other mortgage lenders because they have charge off accounts with outstanding balances on their credit report. Unfortunately, the mortgage loan originators who are telling potential borrowers that they do not qualify for a FHA Loan due to charge off accounts with balances do not know how to read credit reports and FHA Guidelines On Charge Off Accounts . Most charge off accounts on credit reports have outstanding unpaid balances reported and that should not matter. The reason that the outstanding unpaid collection balance is reported on the credit report is because that is the amount the creditor has charged off. On another note, many mortgage loan originators will tell potential mortgage loan applicants that they do not qualify for a FHA Loan after a mortgage charge off account with balance . These inexperienced mortgage loan originators tell FHA borrowers that unless they pay off the mortgage charge off account and get a zero balance letter by the mortgage lender reporting the mortgage charge off account and that zero balance is reported on their credit report that they will not qualify for a FHA Loan. This is not true.  Most, if not all, mortgage charge off accounts will report a balance on the credit report and this is no issue in qualifying for a FHA Loan. If you have been told that you do not qualify for a FHA Loan due to collection accounts with outstanding unpaid balances or mortgage charge off accounts with balances, please do not hesitate to contact me at 262-716-8151 or email me at gcho@gustancho.com. I will help you secure a FHA Loan and make the American Dream Of Home Ownership become a true reality.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

1 Comment

  1. Mary says:

    Can y still get a chance loan with past we energy reporting late payments on your credit report