FHA Guidelines On Collection Accounts


Collection Accounts And FHA Guidelines On Collection Accounts

FHA Guidelines On Collection Accounts
Gustan Cho Associates

If you default on a credit card, auto loan, student loan, installment loan, or any other loan obligation and you do not meet those payment obligations, your account will go into default and collection activities will start.  Most folks have the good intention in paying all of their monthly debt obligations and have no intention of defaulting.  However, there are circumstances where a consumer may lose their job or lose their business where their income stream comes to an abrupt halt and can no longer meet their monthly debt obligations.  When this occurs, the creditor will try to collect on the debt internally for 90 days or so and if the debtor does not make payment arrangements, then the creditor will most likely write off the debt and can sell the debt to a third party collection agency.  The third party collection agency will then purchase the debt for pennies on the dollar or the third party collection agency may contract with the creditor where they get a percentage on what they collect.  Either case, collection activities will be aggressively pursued the first six to 12 months of a fresh collection debt.  Tactics that collection agencies use is calling the debtor or mailing the debtor with threatening like collection letters that if they do not contact the collection agency within the next few days, a lawsuit will be filed and wage garnishment proceedings can be initiated.  Many times, consumers get frightened with such collection tactics and often times borrow money from friends and family members and pay the collection agencies on their collection accounts.  Unfortunately, most often times the debtor cannot continue to make the payments because they have yet found full time employment and eventually give up paying the creditor. With FHA Guidelines On Collection Accounts, collection accounts to not have to be paid to qualify for a FHA Loan.

FHA Guidelines On Collection Accounts And Process Of Collection Accounts

As stated earlier, most collection agencies aggressively pursue in trying to collect a delinquent collection account when they first get it.  After the collection accounts ages, it is harder and harder to collect on collection accounts so many debtors will not be getting harassed after a year or two.  As collection accounts age, many collection agencies give up in trying to collect on the collection accounts.  Collection accounts get bought and sold all the time from collection agencies.  As collection accounts age, the less of a likelihood the collection agency will pursue legal activity to get a judgment.

Why Are Mortgage Lenders Concerned On Collection Accounts?

The biggest fear with collection accounts is that every collection account can turn into a judgment.  A judgment is the worst credit derogatory item you can have on your credit report.  A judgment is a court’s decision that a debtor owes a judgment creditor money and the courts gives authorization to the judgment creditor to proceed with legal proceedings such as attaching liens on assets or garnishing bank accounts and wages to enforce the judgment that the courts have issued.  Most collection agencies will not pursue legal proceedings to get a judgment on a debt unless they know or feel that the judgment debtor has assets or high income because legal proceedings can be quite costly.  A judgment creditor that has a judgment on a consumer who is unemployed or has no assets cannot collect on the judgment because people like these are considered being judgment proof.  Being judgment proof means that the judgment debtor has no means in paying back the judgment issued by the courts.

Can I Qualify For Mortgage With Unpaid Collection Accounts?

FHA guidelines on collections allow for a home buyer or homeowner who needs a refinance mortgage to be eligible for a FHA loan with unpaid collection accounts.  FHA has two categories for collection accounts.  The first category is medical collections.  All medical collection accounts with unpaid balances are exempt and does not count.

The second collection category that FHA has is non-medical collection accounts.  Unpaid non- medical collection accounts such as credit card accounts, repos, installment debt, or other unpaid collection accounts under $1,000 are exempt and do not have to be paid off.  However, if the unpaid non-medical collection accounts have balances of $1,000 or greater, than 5% of the unpaid balance will be used and counted towards debt to income calculations.  If you have a bunch of smaller unpaid collection accounts and the aggregate balance of the total of all of your aggregate unpaid balance yield an unpaid balance of $2,000 or more, than 5% of the unpaid aggregate balance will be used towards calculating your debt to income ratios.  Charge offs and zero balance non-medical collection accounts do not count.

What If Unpaid Collection Account Has Large Balance?

There are cases where unpaid collection accounts can have extremely high unpaid balances such as $10,000 or more.  This is such the case on auto repossessions or higher ticket credit items.  If you have a collection account with an unpaid balance of $20,000, 5% of the unpaid balance is $1,000 per month and that $1,000 per month will be used towards your debt to income calculations.  The good news that FHA allows you to make a written payment agreement with the collection agency and whatever your minimum monthly payment agreement is, that payment will be used towards your debt to income calculations.  On the above example, if you were to make a written payment agreement with the collection agency of the $20,000 unpaid collection balance that you will be making $100 per month, than that $100 per month will be used to calculate the debt to income ratio instead of the $1,000 monthly payment that is calculated by the 5% of the $20,000 unpaid collection balance.  The good news is that this is effective immediately and no monthly payment seasoning is required.

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