In this blog, we will discuss and cover the FHA Mortgage Guidelines on Collection Accounts for qualifying for an FHA loan. Per FHA mortgage guidelines on collection accounts, borrowers can qualify for an FHA loan with outstanding collection accounts without having to pay them to qualify for an FHA home loan.
The Federal Housing Administration (FHA) allows mortgage loan applicants with unsatisfied collection accounts to get approval without having to pay the balances of the collection accounts. The U.S. Department of Housing and Urban Development (HUD) is the parent of HUD and sets the FHA mortgage guidelines on collection accounts.
FHA Mortgage Guidelines On Collection Accounts For FHA Loans
Per FHA mortgage guidelines on collection accounts, homebuyers do not have to pay outstanding collections to qualify for FHA loans. However, many lenders require collection accounts to be paid in full.
Even though FHA mortgage guidelines on collection accounts do not require borrowers to pay outstanding collections, individual lenders can have overlays on FHA loans. Overlays are additional lending requirements above FHA mortgage guidelines on collection accounts set by lenders.
What Are Lender Overlays Versus Agency Mortgage Guidelines
It is legal for lenders to have their own independent lending requirements above the minimum FHA mortgage guidelines on collection accounts. This is because many lenders have mortgage overlays.
Lender overlays are additional lending guidelines that individual lenders impose above and beyond the minimum HUD Agency Guidelines. Gustan Cho Associates has no lender overlays on FHA, VA, USDA, and Conventional loans. Talk to an expert Loan Officer about FHA, VA , USDA and Conventional loan
Do You Have To Pay Collections To Get an FHA Loan?
Why Do Some FHA Lenders Require Collection Accounts To Be Paid?
However, many lenders have overlays that require unpaid collection accounts to be paid. What are overlays? Mortgage lender overlays are when a mortgage lender adds additional qualifying mortgage requirements to the HUD agency mortgage guidelines on collection accounts. Even though HUD does not require borrowers to pay outstanding collections and charged-off accounts, a particular lender can require them to be paid as part of their lender overlays. For example, to qualify for a residential mortgage loan via an FHA-insured mortgage loan, the minimum credit score required is 580 FICO.
Can I Get Approved For FHA Loans With a 500 Credit Score?
HUD allows borrowers under 580 credit scores and down to a 500 FICO to qualify for an FHA loan with an approve/eligible per automated underwriting system (AUS) with a 10% down payment. Most lenders will not touch applicants with under 580 credit scores as part of their lender overlays. However, many banks, credit unions, and mortgage bankers may have their own lender overlays where they will set their own minimum credit score requirements.
Common Lender Overlays Imposed By Mortgage Companies
Lenders can have lender overlays on just about anything. Examples of common lender overlays are credit scores and collection accounts. Most lenders have lender overlays on credit scores. Many lenders require a minimum credit score of 640 when the HUD minimum requirement to qualify for a 3.5% down payment FHA loan is 580. Same with collection accounts.
Do Lenders Have Different HUD Guidelines on Collection Accounts?
Not all mortgage lenders have the same requirements on the same loan program. Some lenders will go off the minimum FHA mortgage guidelines on collection accounts. Other lenders will require collection accounts to be paid before they can qualify with the lender.
Per HUD mortgage guidelines, borrowers do not have to pay outstanding collections and charged-off accounts to qualify for FHA loans.
However, most lenders will require borrowers to pay outstanding collections and charged-off accounts due to their overlays. This holds true even though paying outstanding collections and charged-off accounts is not part of HUD Agency Guidelines.
FHA Loan Approval With High Debt-To-Income Ratios
Debt-to-income ratio lender overlays are also common overlays placed by many lenders. The maximum front-end debt-to-income ratio is 46.9%, and the back-end debt-to-income ratio is capped at 56.9% to get approve/eligible per the automated underwriting system. Most lenders will cap debt-to-income ratios on FHA loans at 45% to 50% as part of their lender overlays Gustan Cho Associates is one of the very few national mortgage companies licensed in multiple states with no lender overlays on government and conventional loans.
How Do Underwriters View Outstanding Collection Accounts?
The Federal Housing Administration does not require unpaid unsatisfied collection accounts to be paid for a mortgage loan applicant to get an FHA loan. FHA Mortgage Guidelines on Collection Accounts do not require borrowers to pay off outstanding collection accounts. FHA Mortgage Guidelines on Collection Accounts have different requirements for non-medical collections, medical collections, and charge-off collection accounts.
Getting Pre-Approved For FHA Loans With Bad Credit
Many lenders have their internal mortgage lending overlays that open collection accounts. The reason why most lenders have overlays on unpaid collection accounts is that they are concerned that unpaid collection accounts can turn into judgments. Gustan Cho Associates has zero overlays. As long as borrowers meet the minimum HUD Agency Guidelines and get approve/eligible per Automated Underwriting System, we just go off AUS with no other overlays.
HUD Guidelines on Non-Medical Collections
Several months ago, open unpaid balances on collection accounts were zeroed out. There was no impact on the applicant’s debt-to-income ratios about the outstanding collection account balance. Updated FHA mortgage guidelines on collection accounts have changed concerning outstanding unpaid collection accounts. New FHA mortgage guidelines on collection accounts have been implemented for unsatisfied collection accounts on FHA home loans.
FHA Mortgage Guidelines on Non-Medical Collections
Per FHA mortgage guidelines on collection accounts, there are two types of collection accounts. Medical collections and non-medical collections. Medical collections are treated differently by mortgage underwriters on FHA loans.
As mentioned earlier, you can qualify for an FHA-insured mortgage loan with open unpaid collection accounts.
How Is 5% of Collection Balance Used As Hypothetical Debt For DTI?
For borrowers with non-medical collection accounts with an aggregate unpaid collection balance of $2,000 or more, mortgage underwriters need to take 5% of the outstanding collection balance into account towards calculating debt-to-income ratios. For example, let’s take a case scenario:
- Borrowers with a total of $10,000 in unpaid collection account balance
- 5% of the $10,000 or $500 will be counted as a monthly minimum payment
- This will be used toward the mortgage applicant’s debt-to-income ratios
- Borrowers do not have to pay this, but it will be used as a hypothetical monthly debt
HUD Debt-to-Income Ratio Guidelines on FHA Loans
There are the new FHA mortgage guidelines on collection accounts. Before recently, the balance of the unpaid collections did not matt. If the 5% of the outstanding collection account will disqualify the borrower due to a high debt-to-income ratio, there is a second option.
The second option is for the borrower to get a written repayment agreement with the creditor and agree to a monthly payment amount. The agreed-upon monthly payment agreement with the creditor will be the monthly payment versus 5% of the outstanding collection balance.
How Outstanding Collections Affect Debt-to-Income Ratio?
The new FHA guidelines on collection accounts can affect those with many unpaid collection accounts. If the 5% of the outstanding collection balance is too much, borrowers should enter into a written payment agreement.
Once the written payment agreement is executed, there is no seasoning period for this new agreed-upon payment to take effect. It is effective immediately.
HUD Guidelines on Charged-Off Accounts
HUD does not require that outstanding charged-off accounts be paid to qualify for FHA loans. The 5% rule on outstanding collections balance does not apply to charged-off accounts.
Charged-Off accounts always have a dollar amount balance on credit reports. That balance is the amount charged off. Borrowers cannot have credit disputes on charged-off accounts. Sometimes, charged-off accounts are reported as Profit And Loss on credit reports. Charged Off Accounts and Profit And Loss are the same on credit report verbiage.
Medical Collections Versus Non-Medical Collection Accounts
Medical collection accounts are treated differently than non-medical collection accounts and are exempt from the HUD Agency mortgage guidelines on collection accounts. A percentage of the unpaid collection account balance will not be used regardless of the balance on unpaid medical collections.
The 5% of the outstanding balance towards the hypothetical minimum monthly payment is not required on medical collections. Medical collections will not affect borrowers’ debt-to-income ratios. As mentioned in our earlier blogs, a credit dispute is not acceptable for mortgage borrowers.
HUD Guidelines on Credit Disputes During The Mortgage Process
Updated HUD Agency Guidelines on credit disputes require borrowers cannot to have any non-medical credit disputes on derogatory credit items if the aggregate balance of all outstanding collection balances is greater than $1,000. The mortgage process will be halted if borrowers have disputes on non-medical collections, late payments, or other derogatory credit tradelines.
Credit Disputes Exempt From Being Removed During The Mortgage Process
Credit disputes on non-medical collections, charged-off accounts, late payments, or other derogatory credit tradelines older than 24 months old are exempt and do not need to be removed.
Borrowers need to retract the credit dispute for the mortgage process to continue. Unfortunately, scores will most likely drop when credit disputes are retracted on a derogatory item with balance.
Why Removing Credit Disputes Can Drop Credit Scores?
There have been cases where a credit dispute retraction has dropped an applicant’s credit score by almost 100 points. Borrowers with collections with zero credit balances, then the above rules on dispute retraction.
Does not apply. Zero balance credit disputes on non-medical collections do not have to be removed. Borrowers can dispute negative, derogatory credit items with zero balances and medical collections.
FHA Guidelines on Collections Over $2,000
HUD guidelines on collection accounts can pose a problem for borrowers with substantial unpaid collection accounts. Even though borrowers do not have to pay outstanding non-medical collections off to qualify for an FHA loan, large collection account balances can pose a debt-to-income ratio problem. We will explain the potential problems high outstanding collection balances can pose when qualifying for an FHA loan.
How Large Non-Medical Collections Can Impact Debt-To-Income Ratio on FHA Loans
Remember that lenders will now require that 5% of the unpaid non-medical collection balance be used towards calculating borrowers’ debt-to-income ratios. A $20,000 unpaid collection account will add an additional $1,000 toward monthly expenses and likely disqualify borrowers. The good news is if, in this situation.
Written Payment Agreement With Collection Agency on Collections Over $2,000
HUD allows borrowers to set up a written payment agreement with creditors and use the monthly written payment agreed upon towards calculating the debt-to-income ratios in lieu of the 5%. On the $20,000 unpaid collection issue, if the borrower sets up a written payment agreement with the creditor of $50.00 per month for so many years, then the $50.00 payment will be used towards the monthly expense. The $50 dollars per month agreed upon payment agreement with the creditor will be used instead of the 5% of the $20,000, or $1,000 per month.
When Can I Use The Agreed Payment With the Collection Agency Versus The 5% of the Collection Balance?
There are no seasoning requirements to this rule. As long as the payment agreement is in effect, the mortgage lender will use them. For borrowers’ medical collection accounts with a credit balance, the above 5% rule does not apply. Credit disputes are exempt from medical collection accounts. Borrowers can dispute medical collections with outstanding balances and are exempt from removing the credit dispute.
Do Not Pay Old Collections Without Negotiating With Creditor
Borrowers deciding to pay off an old outstanding collection account try to negotiate with the creditor. See if they are willing to do a pay-for-delete. This works because the collection agency will agree to delete the derogatory credit tradeline off the credit report in lieu of the agreed payment settlement amount. At the same time, see if they can negotiate the outstanding payment due.
Payment on Written Payment Agreement Can be Used Instead of 5% of the Collection Balance For DTI Calculations
Make sure whatever negotiated amount is in writing. If settling on a collection account on pennies on the dollar, make sure that part of the agreement is to have the collection agency delete derogatory collection items as part of the payoff. As mentioned earlier, the creditor agreeing to delete the collection account from your credit report for the settlement amount is called pay for delete. Do not pay off any collections without addressing credit reporting issues. Remember that paying an old collection account can reactivate credit derogatory items, which will drop credit scores.
How Removing Credit Disputes Will Lower Credit Scores?
Credit scores can drop as much as 100 points when it is re-activated with a new updated date of the last activity. Home Buyers who need to qualify for a mortgage with a national mortgage company licensed in multiple states with no lender overlays can contact us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com.
Gustan Cho Associates is a mortgage broker licensed in 48 states with a national reputation of being able to do mortgage loans other lenders cannot do. Over 75% of our borrowers are folks who could not qualify at other lenders due to overlays, stress, last-minute loan denial, or not having the mortgage products. At Gustan Cho Associates, we only market mortgage loans that exist and are possible at competitive rates. Besides government and conventional loans with no lender overlays, we offer hundreds of non-prime mortgage programs including non-QM and non-prime mortgages.
Gustan Cho Associates has no lender overlays on FHA, VA, USDA, and Conventional Loans. The team at Gustan Cho Associates is available seven days a week, on evenings, weekends, and holidays. Click here to get loan with low credit scores
What Are Bad Credit Mortgage Loans?
Suppose consumers default on a credit card, auto loan, student loan, installment loan, or any other loan obligation and do not meet those payment obligations. In that case, those accounts will go into default, and collection activities will start. Most folks have the good intention of paying all their monthly debt obligations. They have no intention of defaulting. There are circumstances where a consumer may lose their job or business. The outcome is that their income stream comes to an abrupt halt. There are many consumers who can no longer meet their monthly debt obligations. When this occurs, the creditor will try to collect the debt internally for 90 days.
HUD Charge-Off Account Guidelines
The creditor will most likely charge it off if a consumer does not make payment arrangements. Creditors normally sell bad 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 of what they collect. In either case, collection activities will be aggressively pursued during the first six to 12 months of a new collection debt.
Tactics Collection Agencies Use To Collect Debt
Tactics that collection agencies use are the following:
- calling consumers
- mailing consumers with threats like collection letters
- Letters may have a law firm name on them and state 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.
Do I Have To Pay Charge-Off Accounts To Qualify For an FHA Loan?
Many times, consumers get frightened by such collection tactics. Often times borrow money from friends and family members and pay the collection agencies on their collection accounts. Unfortunately, most consumers cannot continue to make the payments because they cannot find full-time employment. They eventually give up paying the creditor. With FHA Guidelines on Collection Accounts, collection and charged-off accounts do not have to be paid to qualify for a mortgage.
How Long Does Collection Accounts Stay on Credit Report?
Collections stay on credit reports for a period of seven years from the date of the last activity. As stated earlier, most collection agencies aggressively pursue trying to collect a delinquent collection account when they first get it.
After the collection accounts age, it is harder and harder to collect on collection accounts. Most consumers stopped getting harassed after a year or two. As the collection and charge-off account age, most collection agencies give up on trying to collect.
Collection and charge-off accounts get bought and sold from collection agencies. As collection accounts age, the less likely the collection agency will pursue legal activity to get a judgment.
Why Are Lenders Concerned With Collection Accounts?
The biggest fear with collection accounts is that every account can become a judgment. A judgment is the worst credit-derogatory item consumers can have. A judgment is a court’s decision that a debtor owes a judgment creditor money. Courts give authorization to the judgment creditor to proceed with legal proceedings such as the following:
- attaching liens on assets
- garnishing bank accounts and wages
- to enforce the judgment, creditors need to follow the legal process
Can I Qualify For an FHA Loan With a Judgment?
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. This is because people like these are considered to be judgment-proof. Being judgment-proof means that the judgment debtor has no means of paying back the judgment issued by the courts.
Can I Qualify For Mortgage With Collection Accounts?
FHA Guidelines on Collection Accounts allow a home buyer or homeowner who needs a refinance mortgage to qualify for an FHA loan with unpaid collection accounts. FHA has two categories for collection accounts per FHA Guidelines on Collection Accounts:
- The first category is medical collections
- All medical collection accounts with unpaid balances are exempt and do not count
What Are Examples of Non-Medical Collection Accounts?
The second collection category that FHA has is non-medical collection accounts. Unpaid non-medical collection accounts are the following:
- such as credit card accounts
- repossessions
- installment debt
- or other unpaid collection accounts
Does FHA Collections Over $2,000 Apply To Medical Collections and Charge-Off Accounts?
However, per FHA Guidelines on Collection Accounts, if the unpaid non-medical collection accounts have $2,000 or greater balances, 5% of the unpaid balance will be used. This figure will be counted towards debt-to-income calculations as a hypothetical debt. Borrowers with a bunch of smaller unpaid collection accounts and the aggregate balance of the total of all of the aggregate unpaid balance yield an unpaid balance of $2,000 or more, the following will apply. 5% of the unpaid aggregate balance will be used for calculating debt-to-income ratios. Charge-offs and zero balance non-medical collection accounts do not count per FHA Mortgage Guidelines on Collection Accounts.
What If Collection Account Has a Large Balance?
In some cases, unpaid collection accounts can have extremely high balances, such as $10,000 or more. This is the case with auto repossessions or higher ticket credit items. Let’s take a case scenario:
- collection account with an unpaid balance of $20,000
- 5% of the unpaid balance is $1,000 per month
- that $1,000 per month will be used toward debt-to-income calculations
Written Payment Agreement on Non-Medical Unpaid Balance Is Too Large
The good news is that HUD allows you to make a written payment agreement with the collection agency. Whatever the minimum monthly payment agreement is, that payment will be used toward debt-to-income calculations. In the above example, if a consumer were to make a written payment agreement with the collection agency for the $20,000 unpaid collection balance and got a written executed payment agreement making $100 per month, that $100 per month would be used to calculate the debt-to-income ratio. This figure is used instead of the $1,000 monthly payment. 5% of the $20,000 unpaid collection balance is no longer used to calculate the debt-to-income ratio. The good news is that this is effective immediately, and no monthly payment seasoning is required. Qualify for mortgage loan with judgements, Click here
Frequently Asked Questions (FAQs)
- What are FHA mortgage guidelines on collection accounts?
FHA mortgage guidelines outline the requirements and considerations for borrowers with collection accounts on their credit reports. - Can I qualify for an FHA mortgage with collection accounts on my credit report?
Yes, qualifying for an FHA mortgage with collection accounts is possible, but certain conditions must be met. - Do FHA guidelines require borrowers to pay off collection accounts before qualifying for a mortgage?
FHA guidelines do not always require borrowers to pay off collection accounts before qualifying for a mortgage. However, lenders may have their requirements regarding collection accounts. - How do collection accounts affect my eligibility for an FHA mortgage?
Collection accounts may impact your credit score and overall creditworthiness, which could affect your ability to qualify for an FHA mortgage. However, FHA guidelines provide some flexibility for borrowers with collection accounts. - Are there specific requirements for handling collection accounts under FHA guidelines?
FHA guidelines may require borrowers to explain and document any outstanding collection accounts, particularly if they exceed a certain dollar amount. - Do FHA guidelines differentiate between medical and non-medical collection accounts?
FHA guidelines may treat medical collection accounts differently from non-medical collection accounts, as medical debt is often considered differently in credit scoring models. - Do FHA guidelines impose a maximum amount for collection accounts?
FHA guidelines may impose a maximum threshold for the total collection accounts allowed for borrowers to qualify for an FHA mortgage. - Am I eligible for an FHA mortgage if I have contested collection accounts on my credit report?
FHA guidelines provide specific instructions for handling disputed collection accounts. Depending on the circumstances, borrowers may need to resolve disputes or provide additional documentation to the lender. - Do FHA guidelines require borrowers to establish payment plans for outstanding collection accounts?
FHA guidelines may require borrowers to establish payment plans or make arrangements to pay off certain collection accounts, depending on the lender’s policies and the specifics of the borrower’s financial situation. - Where can I find more information about FHA mortgage guidelines on collection accounts?
Borrowers can refer to the FHA Handbook (or HUD Handbook 4000.1) or consult an FHA-approved lender for detailed information about FHA guidelines and eligibility requirements regarding collection accounts.
For more information, you can contact us at GCA Mortgage Group by calling 800-900-8569 or text us for a faster response. You can also email us at alex@gustancho.com. Our expert Loan Officers are available even during weekends and holidays!
