Calculating FHA Collections In Debt To Income Ratios

Calculating FHA Collections By Mortgage Underwriters

Mortgage Borrowers can qualify for FHA Loans with outstanding collection accounts. FHA does not require you to pay off the outstanding unpaid collection account balances in order to qualify for a FHA insured mortgage loan. However, FHA will count a percentage of any outstanding non-medical collection account balances and will use it towards calculating the FHA mortgage borrower monthly debt to income ratios. Calculating FHA Collections by mortgage underwriters is categorized into three different categories: Non-Medical Collection Accounts, Medical Collection Accounts, and Charge Off Accounts. Judgments and Tax Liens are calculated separately and we can briefly discuss on how FHA mortgage underwriters calculate judgments and tax liens.

Calculating FHA Collections: Non-Medical Collection Accounts

You do not have to pay off outstanding collection accounts in order to qualify for a FHA Loan under HUD mortgage lending guidelines. If your outstanding unpaid collection accounts on non-medical collection accounts is greater than $2,000, then 5% of the outstanding collection balances of all of your unpaid debts will be used in calculating your month debt to income ratios even though you do not have to pay anything to any creditors. For example, if the total balances add up to $10,000 for all of your creditors and/or collection agencies, then FHA will require 5% of the outstanding unpaid $10,000, or $500, to be used in calculating the borrower’s debt to income ratio. The $500 per month does not need to be paid but will count as a monthly expense for the mortgage loan borrower. Any outstanding unpaid collection account balances under $2,000 that are non-medical collection accounts does not count in calculations of the borrower’s debt to income ratios.

Calculating FHA Collections: Credit Disputes During Mortgage Process

With FHA, you cannot have credit disputes on any charge off accounts and non-medical collection accounts if the total of the outstanding collection account balances of all of your collection accounts are greater than $1,000. You need to retract all non-medical credit disputes with outstanding collection account balances as well as all charge off credit disputes before you are able to proceed with the mortgage application and mortgage approval process. A pre-approval letter should never be issued if there are a lot of credit disputes on a borrower’s credit report because once the credit disputes are retracted, the borrowers credit scores will drop. How much will it drop? That depends on the type of credit disputed item but it can drop significantly. If a home buyer barely qualifies for a 3.5% down payment home purchase FHA Loan with the minimum 580 FICO credit score required and needs to retract credit disputes, chances are that the borrower may no longer qualify for a FHA Loan with 3.5% down payment because FHA requires the 580 FICO minimum. Your mortgage loan officer will help you in boosting your credit scores back up after you retract your credit disputes.

Credit disputes on non-medical collection items with zero credit outstanding balance or paid off collection accounts are exempt and credit disputes are allowed. Medical Collection accounts with outstanding balances are exempt from credit disputes and you can have credit disputes on medical collection accounts.

Calculating Medical Collections: Charge Off Accounts And Medical Collection Accounts

The great news is that FHA does not care about medical collection accounts with outstanding unpaid balances and charge off accounts and they are not calculated in debt to income calculations for a FHA mortgage borrower.  Most charge off accounts will have a balance reporting on the borrower’s credit report, however, that is ignored and will not be used for debt to income ratio calculations. As mentioned earlier, you cannot have credit disputes on any charge off accounts and need to have the credit disputes on all charge off accounts for your mortgage loan approval process to proceed.

Calculating FHA Collections: Judgments And Tax Liens

You can have outstanding judgments and tax liens and still qualify for FHA Loans, however, the judgments and/or tax liens either needs to be paid off prior closing or a written payment agreement needs to be made between the judgment creditor and/or IRS and the borrower and at least three months of payments needs to have been made. You cannot make advanced payments of the three months of payments required. It needs to be seasoned for at least three months.

Why Am I Told That I Do Not Qualify For FHA Loan Because I Have Collection Accounts

Unfortunately, most mortgage lenders will have additional requirements in addition to the minimum FHA Guidelines On Collection Accounts called FHA Investor Overlays . Most banks will require that you pay off all of your outstanding unpaid collection accounts in order for you to qualify with their institution even though it is not a FHA Guideline to pay off your outstanding collection accounts. Also, by paying off your older collection accounts will drop your credit scores because it re-activated your aged dormant collection accounts and re-activates it like it is a recent activity. If you are told that you do not qualify for a FHA Loan due to your mortgage lender overlays, please contact me at 262-716-8151 or email me at gcho@gustancho.com . My staff and I are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

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.

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