Can You Qualify For A Mortgage With Outstanding Collections

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This ARTICLE On Can You Qualify For A Mortgage With Outstanding Collections Was PUBLISHED On September 12th, 2020

The team at Gustan Cho Associates often get countless calls daily by borrowers who ask Can You Qualify For A Mortgage With Outstanding Collections and Charged-Off Accounts?

  • Will outstanding collections and charged-off accounts yield higher mortgage rates?
  • Should I pay off outstanding collections and charged-off accounts?
  • Will paying off the outstanding collections and derogatory credit tradelines boost my credit scores?
  • Why do most lenders require that I pay off my outstanding collections and charged-off accounts in order to qualify me for a home mortgage?
  • The answer to being able to qualify for a home mortgage with outstanding collections and charged-off accounts is YES
  • Mortgage borrowers do not have to pay outstanding collections and/or charged-off accounts to qualify for a home loan
  • Collection accounts that are not paid do not affect mortgage rates
  • You should not pay outstanding collections off
  • Most collections accounts have a statute of limitations of 5 years, depending on the state
  • Any collection accounts and/or derogatory credit tradelines that are older than 24 months will have little to no impact on your credit scores
  • Most lenders will have lender overlays. FHA, VA, Fannie Mae, and Freddie Mac does not require borrowers to pay outstanding collections and/or charged-off accounts
  • However, lenders can set their own lending requirements that are above and beyond the minimum agency guidelines
  • Lenders can require borrowers to pay outstanding collections and/or charged-off accounts even though borrowers do not have to per FHA, VA, Fannie Mae, and/or Freddie Mac
  • Gustan Cho Associates is one of the very few national mortgage companies that do not have any lender overlays on government and conventional loans

In this article, we will discuss and cover Can You Qualify For A Mortgage With Outstanding Collections.

Can You Qualify For A Mortgage With Outstanding Collections: Agency Guidelines Versus Lender Overlays

Not all lenders have the same mortgage guidelines when it comes to outstanding collections and charged-off accounts.

  • All lenders need to have their borrowers meet the minimum agency mortgage guidelines
  • FHA, VA, USDA, Fannie Mae, and Freddie Mac have their own agency mortgage guidelines when it comes to collections, charged-off, and derogatory credit accounts
  • However, mortgage companies can have their own lending requirements that are higher than the minimum agency mortgage guidelines on government and conventional loans

Mortgage lenders can have lender overlays on just about anything.

Do All Lenders Have The Same Requirements On Collections And Charged-Off Accounts

All lenders need to meet the minimum agency mortgage guidelines on government and conventional loans.

  • However, lenders can have higher lending requirements that are above and beyond the minimum agency mortgage guidelines
  • This holds true on collection accounts and/or charged-off accounts
  • All agency mortgage guidelines do not require outstanding collections and/or charged-off accounts to be paid off to qualify for an owner-occupant primary home loan
  • However, lenders can require borrowers to pay outstanding collections as part of their lender overlays
  • Other lenders like us at Gustan Cho Associates have no lender overlays on government and conventional loans
  • This holds true on outstanding collections

Gustan Cho Associates has zero overlays on collections and/or charged-off accounts. GCA Mortgage Group only goes off the automated findings of the automated underwriting system (AUS).

How Mortgage Underwriters View Outstanding Collections And Charged-Off Accounts

Mortgage borrowers do not have to pay outstanding collections and charged-off accounts. However, there are ways mortgage underwriters view outstanding collection accounts. There are two types of collection accounts:

  • Medical collections
  • Non-Medical collections

All non-medical collection accounts with an unpaid outstanding balance of $2,000 or greater, the mortgage underwriter need to take 5% of the total aggregate balance and use it as a hypothetical debt when calculating the borrower’s debt to income ratios:

  • This holds true even though the borrower does not have to pay anything and just leave the collection accounts alone
  • Non-medical collection accounts with a total aggregate outstanding balance of $2,000 or less are exempt from the 5% rule
  • If 5% of the outstanding balance is too much, the borrower can negotiate a written payment agreement with the creditor
  • The negotiated amount on the written payment agreement is the amount used as the monthly debt versus the 5.0% of the outstanding balance
  • There is no seasoning requirement on the number of months the monthly payment from the written payment agreement needs to be seasoned
  • The date the written payment agreement is negotiated and executed, borrowers can use the new written payment agreement versus the 5% of the outstanding collection balance

Medical collections are exempt from the 5.0% rule. Charged-off accounts are also exempt from the 5.0% rule.

Qualifying For A Mortgage With A Lender With No Overlays

Gustan Cho Associates has no overlays on government and conventional loans. GCA Mortgage Group has no lender overlays on collections and charged-off accounts. To qualify for a mortgage with outstanding collections and charged-off accounts, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at GCA Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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