How Do Mortgage Lenders View Collection Accounts

Home Loan With Collection Accounts

Gustan Cho Associates

There are periods when extenuating circumstances happen during a person’s life due to loss of job, a loss of business, divorce, or medical issues.  Mortgage lenders understand that and every mortgage lender will view derogatory information on a case by case basis.

FHA guidelines do not require that collection accounts be paid in order to be eligible to qualify for a FHA insured mortgage loan.  FHA classify unpaid collection accounts into two categories: Non-medical collections and medical collections.  Medical collection accounts are viewed much favorably than non-medical collection accounts and have much lenient guidelines compared to non-medical collection accounts.

Mortgage lenders frown on collection accounts and most banks will not deal with anyone who had a prior collection account in the past 36 months and may require all collection account to be paid off prior to closing.  Some banks, credit unions, and mortgage company may require that all collection accounts be paid off prior to the mortgage loan applicant applying for a residential mortgage loan.  Again, a mortgage applicant can qualify for a mortgage loan without having to pay off prior collection accounts with balances.  If you go to a bank, credit union, or mortgage company and they ask you that you need to pay off all of your collection accounts in full, go somewhere else because paying off your old collection accounts is not a mandatory federal mortgage lending guidelines.

Mortgage Lender Overlays

Mortgage lenders who do not have their own mortgage lender overlays will just go off FHA minimum mortgage lending guidelines on collection accounts.  However, mortgage lenders can have, and many do, guidelines that are stricter than the minimum lending guidelines set by HUD, especially banks and credit unions.  Mortgage lender overlays are additional private guidelines that are on top of the minimum guidelines imposed by HUD.  For example, FHA guidelines to qualify for a home purchase with a 3.5% down payment is 580 FICO credit scores.  However, many mortgage lenders may have their own mortgage lender overlay that will require a minimum of a 640 FICO credit score.  Same goes with debt to income ratios.  FHA maximum debt to income ratios to qualify for a mortgage loan is 56.9% DTI.  However, banks, credit unions, and mortgage companies may have their own mortgage lender overlays that will cap a mortgage loan applicant’s debt to income ratios at 40%, 45%, or 50% depending on the particular mortgage lender.

Medical Collections Versus Non-Medical Collections: 2014 Update

Medical collection accounts are viewed much favorably than non-medical collection accounts.  FHA guidelines came up with new rules in early 2014 on non-medical collection accounts with credit balances.  If you have an unpaid collection account balance on a non-medical collection account over $1,000, 5% of the the unpaid medical collection balance will be counted towards your debt to income ratio income qualification.  For example, if you have a $2,000 unpaid non-medical collection account for $2,000, 5% of the $2,000 or $100 will be used as a monthly obligation even though you are not paying it towards your debt to income ratio qualification.  Unpaid medical collection account balances is exempt from this rule.  You can have a $10,000 medical collection and you will be okay.  This rule may be over-riden by the particular mortgage lender you go to and the particular mortgage lender you go to may require that you pay off your old unsatisfied collection balances.  If this is the case, you need to find a mortgage lender that has no mortgage lender overlays and just go off the federal mortgage lending guidelines.

Credit Dispute With Open Credit Balances: 2014 Update

Many folks with prior bad credit go through a credit repair program where they dispute derogatory credit items on their credit report by disputing them with the three credit reporting agencies.  However, there are new rules in 2014 regarding credit disputes with open credit balances.  Again, this new rule is different with regards to non-medical collections and medical collections.

You cannot have a credit dispute on a derogatory item with a credit balance over $1,000 on a non-medical collection account.  Your mortgage application process with come to a halt until the credit dispute with the creditor is removed from your credit report.  Unfortunately, once you retract your credit dispute, the chances are that your credit scores will drop.  In certain cases, a credit dispute retraction can plummet your credit scores by 50 or more FICO points.  Charge offs, zero balance collection accounts, and medical collections are exempt and you can have credit disputes with these derogatory items but federal mortgage lending guidelines do not allow credit disputes with unpaid credit collection items of greater than $1,000.

What If I have A Large Collection Balance And Exceed The Debt To Income Ratio Cap?

Tbere are folks with a substantial unpaid collection balance and the new collection debt to income rule may disqualify the mortgage loan applicant because calculating the 5% of the collection balance with exceed the maximum debt to income ratio cap.  There is a solution to this problem.  Fannie Mae will allow for a mortgage loan applicant to enter into a payment agreement with a creditor and whatever the minimum monthly payment they agree upon, that payment will be used as the monthly payment obligation on the collection account instead of the 5% of the credit unpaid collection balance.  For example, if a mortgage applicant has a $20,000 unpaid collection balance, 5% of the $20,000 is $1,000 per month that would have been taken into account in the debt to income ratio qualification.  However, if the mortgage loan applicant has a written agreement with the collection creditor that he or she will make a $200 monthly payment, then the $200 monthly payment obligation will be used in lieu of the $1,000 as long as a written agreement can be provided to the mortgage lender.  There are no seasoning requirement with this new 2014 mortgage lending guidelines on the payment agreement rule.

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