Collection Accounts: Home Loan With Bad Credit

Mortgage lenders will allow open collection accounts in qualifying for a mortgage loan.  Open collection accounts do not have to be paid in order for the mortgage lender to approve a residential mortgage loan.  However, there are mortgage lenders that do require collection accounts to be prior to closing or at closing as part of their own mortgage lender overlays.  For those mortgage lenders with no overlays, mortgage loan applicants do not have to pay off old collection accounts with balances.  However,  FHA recently changed rules in collection accounts.

2014 Mortgage Guidelines For Collection Accounts

If you have unpaid non-paid collection accounts, 5% of the unpaid balance is used towards calculating your debt to income ratios.  Even though you are not paying on your unpaid non-medical collection accounts, the mortgage underwriter will automatically take 5% of the unpaid balance and add it as a monthly payment and use it towards your debt to income ratios.  For example, if you had an unpaid non-medical collection account with a credit balance of $1,000, the mortgage loan underwriter will use 5% of the $1,000 balance you owe, $50.00, and use it towards your monthly expenses and will be used to calculate your debt to income ratios.  This rule only applies if the total aggregate amount of collection account balance exceeds $1,000.  For those who have unpaid non-medical collection accounts under $1,000, they are exempt from this deduction.

Unpaid Medical Collection Accounts

For collection accounts that are medical collections, the above rules do not apply.  You can have open collection accounts on medical and there are no limits as of the amount of balance you have.

Credit Disputes During Mortgage Process

Credit disputes for any non-medical collection accounts with open credit balances that exceed $1,000 or more is not allowed.  For those going through credit repair and disputing derogatory credit items with credit balances, that is the worst thing you can do.  Mortgage lending guidelines prohibit credit dispute on items over $1,000 that is non-medical and will require that you retract the credit dispute.  The problem with retracting a credit dispute is that it will plummet your credit scores.  I had a case where one mortgage loan applicant had to retract a credit dispute with a credit balance and once the credit dispute was retracted, it dropped her scores by almost 100 FICO points.  Credit disputes with zero balances does not apply.  You can dispute derogatory credit items with zero balances and will not affect your mortgage application process.  Medical derogatory credit disputes with credit balances are also exempt from this rule.

Gustan Cho


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