Conventional Loan Collection Accounts Guidelines

Gustan Cho Associates
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This BLOG On Conventional Loan Collection Accounts Guidelines Was UPDATED And PUBLISHED On November 24th, 2020

Conventional Loan Collection Accounts Guidelines for 2021 are implemented and set by Fannie Mae and Freddie Mac.

  •  FHA, part of the United States Department of Housing and Urban Development or known as HUD, set the mortgage lending guidelines pertaining to FHA Loans
  • Fannie Mae, Freddie Mac, and HUD has separate mortgage lending guidelines pertaining to outstanding collection accounts and charge off accounts when qualifying for a home loan
  • Conventional Loan Collection Accounts Guidelines state borrowers can qualify for conventional loans with unpaid outstanding collection accounts and charge off accounts
  • Borrowers can qualify for conforming loans without having to pay outstanding collections and/or charged-off accounts
  • However, Fannie Mae and Freddie Mac Agency Guidelines on collection accounts differs on owner-occupant homes, second homes, and investment property financing

In this article, we will discuss and cover Conventional Loan Collection Accounts Guidelines.

Fannie Mae Guidelines On Collections And Derogatory Credit

Conventional Loan Collection Accounts Guidelines

In this blog article, we will be discussing non-mortgage conventional loan collection accounts guidelines set by Fannie Mae and Freddie Mac.

  • Under Fannie Mae and Freddie Mac Agency Guidelines, credit accounts that are reported past due on a consumer’s credit report which are not reported as collection accounts must be brought current
  • What this means is any late payments in arrears that are not in collections and/or charged-off need to be brought up to date for borrowers to be eligible to qualify for conventional loans
  • It needs to be up to date in order for the borrower to qualify for a conventional loan
  • If a borrower is qualifying for a one-unit owner-occupant principal residential property, the borrower is not required to pay off any unpaid outstanding collection accounts and/or non-mortgage charge off accounts
  • This holds true regardless of the collection account balance

Fannie Mae and Freddie Mac’s guidelines on collections and/or non-mortgage charge off accounts on conventional loans on primary owner-occupant single family homes are the same as HUD’s agency guidelines on FHA loans.

Fannie Mae And Freddie Mac Guidelines On Collections And Non-Mortgage Charged Off Accounts On Owner-Occupant 2 To Unit Multi-Family Homes And Second Homes

If the borrower is qualifying to purchase a two to four-unit owner-occupant primary property and/or second home property the following rule applies:

  • Unpaid outstanding collection accounts and/or non-mortgage charge offs that total more than $5,000 needs to be paid in full prior to or at closing
  • Therefore, if a borrower is buying a two to four unit primary owner-occupant multi-family home, they can have outstanding collections and/or charged-off account but cannot be larger than $5,000
  • Buyers of second homes or homeowners refinancing second homes cannot have unpaid collections and/or charged-off accounts larger than $5,000

Borrowers need to pay the outstanding unpaid collections and/or charged off accounts if the balance is larger than $5,000  to be eligible to qualify on 2 to 4 unit primary owner occupant home and/or second home conventional loans.

Outstanding Collections On Investment Home Financing

There are stricter guidelines on unpaid collection accounts on investment property financing. Fannie Mae and Freddie Mac any unpaid collection accounts and/or non-mortgage charged off accounts to adhere to the following guidelines in order for borrowers to be eligible for conventional loans on investment properties:

  • Unpaid individual collection accounts that equal or is greater than $250 and collection accounts that total more than $1,000 must be paid in full prior to or at closing

The reason why Fannie Mae and Freddie Mac have stringent guidelines on collection accounts is because collection and charged-off accounts can turn into judgments if the creditor pursues further collection activity.

FHA Versus Conventional Collection Accounts Guidelines

FHA has different guidelines on outstanding collection accounts than Conventional Loans. FHA classifies collection accounts into three categories:

  1. Medical Collection Accounts
  2. Non-Medical Collection Accounts
  3. Charge Off Accounts

FHA exempts medical collection accounts and charged-off accounts from debt to income ratio calculations.

However, non-medical collection accounts with outstanding balances of greater than $2,000 FHA requires the following:

  • that 5% of the outstanding unpaid collection account balance needs to be used to calculate the borrower’s debt to income ratios
  • this holds true even though the borrower does not have to pay anything
  • the 5% of outstanding debt is just a hypothetical debt
  • only applies to non-medical collection accounts and does not apply for a charged-off account

This does not apply for Conventional Loans on primary one unit owner occupant properties.

Mortgage Lender Overlays On Conventional Loans

Mortgage Lender Overlays On Conventional Loans

A large percentage of my borrowers come to me because they could not qualify at other banks and/or mortgage companies because they have outstanding collection accounts.

  • Most banks and mortgage companies will not approve a borrower with unpaid outstanding collection accounts and/or charge off accounts
  • They will not approve unless it has been paid in full and reflected that it has been paid in full on their credit reports
  • Some banks and mortgage lenders will even take a step further and require that the collection accounts and charge off have been paid in full and seasoned for at least two years
  • How can this be when Conventional Loan Collection Accounts Guidelines do not require outstanding collection accounts and non-mortgage charge off accounts to be paid to qualify for a conventional loan?
  • The reason banks and many mortgage companies require that all unpaid outstanding collection accounts be paid in full when Fannie Mae and Freddie Mac does not require it paid off is due to mortgage lender overlays 
  • Lender overlays are additional mortgage guidelines that are set on top of the minimum lending guidelines by Fannie Mae and Freddie Mac
  • It is not illegal for a bank or mortgage lender to add additional lending requirements and standards on top of the minimum mortgage lending guidelines required by Fannie Mae and Freddie Mac

If you are a home buyer or homeowner who needs a conventional loan but has outstanding collection accounts and/or non-mortgage charge off accounts and needs a conventional mortgage lender with no lender overlays, please call me at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take your phone calls and answer any questions you may have.

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