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Collections And Charge-Off Accounts Guidelines On VA And FHA Loans

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Collections And Charge-Off Accounts Guidelines On VA And FHA Loans

This BLOG On Collections And Charge-Off Accounts Guidelines On VA And FHA Loans Was PUBLISHED On March 12th, 2019

Both VA and FHA Loans have similar collections and charge-off accounts guidelines.

  • Per VA and FHA Collections And Charge-Off Accounts Guidelines, borrowers do not have to pay outstanding collections and charged-off accounts to qualify no matter how much the balance due 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 and VA Collections And Charge-Off Accounts Guidelines, BOTH agencies do not require borrowers to pay off outstanding collections/charged-off accounts
  • Lenders that require them paid off are lenders that have overlays on VA Loans

Gustan Cho Associates Mortgage Group are direct lenders with no overlays on government and conventional loans. 

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

Gustan Cho Associates at Loan Cabin Inc. has no overlays on government and conventional loans.

Medical Versus Non-Medical Collections Mortgage Guidelines

Medical collections is 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
  • 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
  • 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

Medical collections and charged-off accounts are exempt from the 5% rule.

Government And Conventional Loans

Collections And Charge-Off Accounts Guidelines above applies to owner-occupant primary mortgage loans on FHA, VA, USDA, and Conventional Loans. Borrowers do not have to pay outstanding collections and charged-off accounts to qualify for owner occupant government and conventional loans. It does matter on conventional investment property loans. There are limits on the amount 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 faster response. Or email us at gcho@loancabin.com. The Team at Gustan Cho Associates Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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