Qualify For FHA Loan With Unpaid Charge Offs Mortgage Guidelines

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This BLOG On Qualify For FHA Loan With Unpaid Charge Offs Mortgage Guidelines Was UPDATED And PUBLISHED On April 11th, 2020

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Qualify For FHA Loan With Unpaid Charge Offs With Lender

Charge Off Accounts are negative credit items where a consumer has not paid their debt payments to the creditor:

  • The creditor has charged it off on their books after 120 days
  • Charge Off Accounts do not relieve the consumer of their debt obligations by creditors
  • Charge off accounts means that the creditor has deemed the debt uncollectible
  • Creditors has written the debt off
  • Creditors can sell charge off accounts to credit collection companies
  • Collection agencies can try to go after the consumer
  • They can try to collect on the charge off collection accounts
  • A home buyer can qualify for FHA Loan With Unpaid Charge Offs without having to satisfy the charge off accounts
  • Most charge off accounts show a balance on the consumer’s credit report
  • That is normally how it is reported
  • Lenders do not need to take a percentage of a charge off account and use it for debt to income ratio calculations
  • Mortgage Underwriters do need to take 5% of non-medical collection accounts with outstanding unpaid collection balances as use it as borrowers monthly hypothetical debt

In this article, we will discuss and cover how to Qualify For FHA Loan With Unpaid Charge Offs And Collections.

Qualify For FHA Loan With Unpaid Charge Offs And Guidelines On Collection Accounts Versus Charge Offs

Under Qualify For FHA Loan With Unpaid Charge Offs, HUD does not require borrowers to have to pay off collection accounts and charge off accounts.

However, FHA does classifies collection accounts into two different categories:

  • Medical Collections
  • Non-Medical Collections

Medical Collection Accounts are exempt:

  • A percentage of the outstanding unpaid balance is not used to calculate the borrower’s debt to income ratios
  • However, with non-medical collections with outstanding unpaid credit balances, 5% of the unpaid outstanding collection account balance will be used as a monthly debt expense

This holds true even though the borrower does not have to pay, and used in the calculation of the borrower’s debt to income ratios.

How Mortgage Underwriters Treat Derogatory Credit Tradelines

How Mortgage Underwriters Treat Derogatory Credit Tradelines

Borrowers who have large outstanding collection account balances and the 5% of the outstanding unpaid collection account balance will disqualify them due to exceeding the maximum debt to income ratios required by lender can do the the following:

  • The borrower can enter into a written payment agreement with the creditor and/or collection agency
  • make a written payment agreement
  • the amount agreed in the written payment agreement will be used in lieu of the 5% of the outstanding unpaid collection account balance
  • There are no mandatory seasoning payment requirements with non-payment collection accounts
  • the written payment agreement is effective the date it is executed

Once the written payment agreement with the creditor and/or collection agency is executed, then that date will be the effective date.

Qualify For FHA Loan With Unpaid Charge Offs On Medical Versus Non-Medical Collections And Charge Off Accounts

With medical collections, outstanding unpaid balances on medical collection accounts are exempt:

  • A percentage of the outstanding unpaid collection balance is not taken into consideration as a monthly debt and can be ignored on medical collections
  • Same principal with charge off accounts
  • All non-medical charge off accounts will not count in calculations of debt to income calculations

However, credit disputes are not allowed on charge off accounts and non-medical collection accounts with a total outstanding and unpaid balance of $1,000:

  • Those credit disputes needs to be retracted in order for the mortgage approval process to continue
  • One of the main issues that come into play with retracting credit disputes is that once a consumer retracts an active credit dispute, their credit scores often drops

Qualify For FHA Loan With Unpaid Charge Offs On Mortgage Versus Non-Mortgage Charge Offs

How to qualify for an FHA loan with free mortgage write-offs compared to non-mortgage write-offs

HUD classifies charge offs into two different categories:

  • Mortgage Charge Offs
  • Non-Mortgage Charge Offs

Both of these two types of charge off accounts are treated differently:

  • Borrowers can qualify for a FHA Loan with unpaid charge offs that is mortgage related
  • This is where the credit report shows an outstanding unpaid balance on the consumer credit report as a mortgage charge off
  • However, there is a three year waiting period from the mortgage charge off date in order for them to qualify for FHA Home Loans
  • There is no waiting period on second mortgage charge offs with an outstanding unpaid collection balance reporting

Borrowers will qualify for an FHA loan after three years after the reported date of the first mortgage charge off account.

With non-mortgage charge offs, there is no mandatory waiting period after the reported date of the non-mortgage charge offs to qualify for a FHA Loan.

  • Medical collection accounts and/or medical charge offs are exempt altogether

Borrowers told they do not qualify for a FHA Loan unless you pay off outstanding collection account balances, look no further and contact us at Gustan Cho Associates at 262-716-8151 or text for a faster response. Or email us at gcho@gustancho.com. We have no FHA lender overlays and FHA mortgage borrowers are not required to pay off outstanding unpaid collection accounts or charge off accounts.

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