Collections And Charge-Off Accounts Guidelines On Home Mortgages
This Article Is About Collections And Charge-Off Accounts Guidelines On Home Mortgages
All Agency Guidelines on Collections And Charge-Off Accounts Guidelines On Home Mortgages state they do not have to be paid to qualify for a primary owner occupant home loan:
- FHA and VA both have similar collections and charge-off accounts guidelines
- So does Fannie Mae and Freddie Mac Agency Guidelines on primary owner-occupant conventional loans
- Many homebuyers will start preparing for a mortgage months prior to applying by paying outstanding collections and/or charged-off accounts without contacting a loan officer
- Paying outstanding collections and charged-off accounts is not necessary to qualify for a home mortgage
Agency Guidelines Versus Lender Overlays On Collections And Charged-Off Accounts
Per HUD, VA, Fannie Mae, and Freddie Mac Collections And Charge-Off Accounts Guidelines, borrowers do not have to pay outstanding collections and charged-off accounts to qualify for a mortgage:
- This holds true no matter how large the outstanding balance is
- Then why is it that many lenders turn away borrowers with outstanding collections and/or charged-off accounts?
- This is because lenders have mortgage overlays
- What are overlays?
- Lender overlays are additional lending guidelines on top of minimum agency guidelines
- Per HUD, VA, Fannie Mae, and Freddie Mac Collections And Charge-Off Accounts Guidelines, they do not require borrowers to pay off outstanding collections/charged-off accounts
- Lenders that require them paid off are lenders that have overlays on government and conventional loans
Gustan Cho Associates Mortgage Group is a national mortgage company licensed in multiple states with no overlays on government and conventional loans. In this article, we will discuss and cover Agency Guidelines on Charged-Off and Collection Accounts.
Why Do Lenders Have Different Lending Guidelines On Government Loans
Every lender needs to have borrowers meet the minimum agency guidelines by FHA, VA, USDA, Fannie Mae, Freddie Mac.
- However, lenders are allowed to have higher lending standards than the minimum lending requirements
- This higher lending standard is called lender overlays
- This is the reason why not all lenders have the same lending requirements on government and/or conventional loans
- Just because a borrower is denied for an FHA Loan by one lender does not mean they cannot qualify at a different lender
- The Department Of Veterans Affairs does not have any credit score requirements
- However, most lenders require a minimum credit score such as 620 to 640 FICO
- VA does not have any maximum debt to income ratio cap
- However, most lenders will have a maximum of 41% to 50% debt to income ratio cap
- Lenders can set their own lender overlays on just about anything and everything
- It is not illegal for lenders to have their own lender overlays
- This is why it is important for borrowers to research and learn the basic agency mortgage guidelines
- If you meet all the agency guidelines and a lender tells you that you do not qualify for a home mortgage, you then know that you do qualify but not at that particular lender
Gustan Cho Associates has no overlays on government and conventional loans. Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other lenders due to their lender overlays.
Collections And Charge-Off Accounts Guidelines On Medical Versus Non-Medical Collections
There are two different types of collection accounts. Non-Medical versus Medical Collections. Medical collections are treated differently than non-medical collections by mortgage lenders.
- On non-medical collections with an outstanding balance of over $2,000, underwriters need to take 5% of the outstanding collection balance and use it as a monthly hypothetical debt
- This holds true no matter how large the outstanding balance is
- The borrower does not need to pay the 5% hypothetical payment
- However, mortgage underwriters will use the 5% hypothetical payments when calculating the borrower’s debt to income ratios
- If the outstanding balance is a substantial amount and the 5% hypothetical monthly debt disqualifies DTI of the borrower, the borrower can enter into a written payment agreement with the creditor
- The new written payment agreement will be used versus the 5% hypothetical monthly debt
- For example, if a borrower has $100,000 outstanding non-medical collection balance, 5% of the outstanding balance would be $5,000 per month
- If borrowers do not want to use the $5,000 per month as a hypothetical monthly debt, the borrower can negotiate a $500 written monthly payment agreement with the creditor
- Lenders will use the $500 versus $5,000 monthly payment as a monthly debt on the derogatory items
- Needs to be a written payment agreement
- There is no seasoning requirement on the number of payments borrowers need to make to the creditor
- If the borrower and the creditor enter into a written agreement today, that payment will be used by the mortgage underwriter effective today
Medical collections and charged-off accounts are exempt from the 5% rule.
Collections And Charge-Off Accounts Guidelines On Government And Conventional Loans
Collections And Charge-Off Accounts Guidelines above applies to owner-occupant primary mortgage loans on FHA, VA, and Conventional Loans. Borrowers do not have to pay outstanding collections and charged-off accounts to qualify for government and owner-occupant conventional loans. It does matter on conventional investment property loans. There are limits on the number of collections/charged-off accounts you can have on investment property loans. If you are told that you do not qualify for a mortgage due to collections and/or charged-off accounts by a lender, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] The Team at Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates are also experts in non-QM and alternative financing mortgage programs. We are one of the very few lenders that offer one day out of bankruptcy and foreclosure non-QM home mortgages. Our 12-month bank statement mortgage loans for self-employed borrowers with no income tax returns required is one of our most popular loan programs. There are no maximum loan limits on non-QM loans. There is no private mortgage insurance required on non-QM loans.