What Are Charge Offs And Collections?

If you have lost your job or are experiencing financial difficulties, you probably cannot pay your minimum debt payments.  If your financial situation does not improve in the short term, the chances are that your creditors will be contacting you via telephone and/or mail demanding that you catch up.  This will most likely continue for the next few months.  If the creditor does not get a payment from you in four to six months, the creditor will deem your debt as uncollectible and several things may happen.

Charge Offs And Collections And Credit Report

First, they will most likely already have reported you to the three credit reporting agencies ( Transunion, Experian, Equifax ) so your credit scores most likely have plummetted.  The next move your creditor most likely will make is hire a third party collection agency and work out an agreement with the collection agency where they get a percentage of the bad debt they collect.  Collection agencies are ruthless and extremely aggressive and will do everything in their power to try to collect on the bad debt because that is the only way they get paid.  If they don’t collect, they do not get paid.  There are federal rules and regulations that regulate collection agencies and how they can go about collecting your debts.  Unfortunately, many collection agencies do not abide by those rules and might try to use scare tactics in collection procedures.  If collection efforts are not successful, a creditor will write your debt off their books and charge off your debt obligations.  Your derogatory bad debt will be reported as a charge off on your credit report.

More On Charge Offs

Once a creditor charges off your debt, they normally gave up on collecting on your delinquent debt.  This does not clear you from the past debt obligations until the statute of limitations expires on your debt.  The creditor normally sells charge offs to third party debt collectors for pennies on the dollar.  These debt collectors now own the paper and the collection process repeats itself.

Charge Offs And Collections: Can I Still Qualify For A Mortgage?

You can still qualify for a residential mortgage loan with charge offs and collections.  You do not have to pay off open collection accounts if you work with a mortgage lender that have no mortgage lender overlays.  It is not a FHA or Fannie Mae guideline that you need to have collection accounts paid off.  However, many mortgage lenders do have their own internal mortgage lender overlays where they require collection account to be paid off.  If this is the case, you have other options.  If you are a mortgage loan borrower in Illinois, Florida, Wisconsin, Indiana, or California and are looking for a mortgage lender with no mortgage lender overlays, please contact me at www.gustancho.com or call me at 262-716-8151.  I represent wholesale mortgage lenders that have no mortgage lender overlays.

Collection Accounts With Credit Balances And Debt To Income Ratios

If you have charge offs on your credit report, the mortgage lender will need to actually confirm that the bad debt is an actual charge off and that there is zero balance reflected on the credit report.  If you collection accounts on your credit report and there is a balance on your bad debt, some mortgage lenders might use 5% of the bad debt balance to calculate your debt to income ratio.  For example, if you have a collection account with a $1,000 balance on it, the mortgage lender will not require to pay that off but might use 5% of the $1,000, or $50 dollars per month, towards your monthly payment obligations which will increase your debt to income ratios.  Some mortgage lenders ignore this while others are requiring this.  The reason being is that open collection accounts can potentially turn into judgments in the future.

By Gustan Cho


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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