In this article, we will cover and discuss conventional loan collection accounts guidelines. Conventional Loan Collection Accounts Guidelines for 2023 are implemented and set by Fannie Mae and Freddie Mac.

FHA, part of the United States Department of Housing and Urban Development, commonly referred to as HUD, set the mortgage lending guidelines for FHA loans. In the following paragraphs, we will cover conventional loan collection accounts guidelines and comparing to HUD’s guidelines on FHA loans.

Can I Buy a House If I Have Accounts in Collections?

Fannie Mae, Freddie Mac, and HUD have separate mortgage lending guidelines about 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 differ on owner-occupant homes, second homes, and investment property financing.

Are Collections Considered in DTI?

In finance and banking, DTI typically stands for “Debt-to-Income ratio.” Lenders use this ratio to evaluate a borrower’s capacity to handle monthly payments and repay debts. When calculating DTI, both the borrower’s debts and income are considered.

Collections, such as overdue debts sent to collection agencies, are usually included in the debt portion of the DTI calculation. This means that any outstanding collections would be considered as part of the borrower’s total debt obligations. The presence of collections can impact a borrower’s DTI ratio and ability to qualify for certain loans or interest rates.

It’s essential for borrowers to be aware of any collections on their credit report and to understand how they might affect their financial standing, including their DTI ratio. Working to resolve collections and improve overall financial health can positively impact loan eligibility and terms. Get qualify for conventional loans with unpaid outstanding collection accounts

Fannie Mae Guidelines on Derogatory Credit and Conventional Loan Collection Accounts Guidelines

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.

Any late payments in arrears not in collections and charged off must be brought up to date for borrowers to qualify for conventional loans. It needs to be up to date for the borrower to qualify for a conventional loan.

Suppose a borrower qualifies for a one-unit owner-occupant principal residential property. In that case, the borrower is not required to pay off any unpaid outstanding collection and non-mortgage charged-off accounts. This holds true regardless of the collection account balance. Fannie Mae and Freddie Mac’s guidelines on collections and 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.

Does FHLMC Require Collections to be Paid?

According to Freddie Mac, a significant participant in the secondary mortgage market, when approving a mortgage, collections do not need to be paid off. However, lenders who ultimately originate the loans may have their policies regarding collections. Some lenders may require collections to be settled before approving a mortgage, while others may not.

Therefore, borrowers should communicate with potential lenders to understand their specific collection requirements and their impact on the mortgage application process. By doing so, borrowers can navigate the mortgage process more effectively and increase their chances of approval.

Fannie Mae & Freddie Mac Guidelines for Collections on Multi-Family and Second Homes

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

• Unpaid outstanding collection accounts and non-mortgage charge-offs that total more than $5,000 needs to be paid in full before 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 charged-off accounts but cannot be larger than $5,000
• Buyers of second homes or homeowners refinancing second homes cannot have unpaid collections and charged-off accounts larger than $5,000

Borrowers must pay the unpaid collections and charged-off accounts if the balance exceeds $5,000 to qualify for 2-to 4-unit primary owner-occupant home and second home conventional loans.

Fannie Mae and Freddie Mac Outstanding Collections on Investment Home Financing

Fannie Mae and Freddie Mac set the agency guidelines on collection and charged-off accounts on conventional loans. Homebuyers can qualify for conventional loans on owner-occupant primary homes, second homes, and investment properties. Second homes and investment properties have tougher mortgage guidelines on conventional loans.

Fannie Mae and Freddie Mac Conventional Collection Accounts Guidelines on Investment Properties

There are stricter guidelines on unpaid collection accounts on investment property financing. Fannie Mae and Freddie Mac, any unpaid collection and non-mortgage charged-off accounts, must adhere to the following guidelines for borrowers 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 before or at closing. Fannie Mae and Freddie Mac have stringent guidelines on conventional loan collection accounts guidelines. This is because collection and charged-off accounts can turn into judgments if the creditor pursues further collection activity.

Comparison: Fannie Mae/Freddie Mac vs. HUD Guidelines on Loan Collections

HUD, the parent of FHA, has different guidelines on outstanding collection accounts than Conventional Loans. HUD classifies collection accounts into three categories:

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

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

HUD Non-Medical Collection Account Guidelines on FHA Loans

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 to a charged-off account

This does not apply to Conventional Loans on primary one-unit owner-occupant properties. Click here to apply for FHA Loans

Mortgage Lender Overlays on Conventional Loans on Collection Accounts

Many of our borrowers come to me because they could not qualify at other banks and mortgage companies because they have outstanding collection accounts. Most banks and mortgage companies will not approve a borrower with unpaid outstanding collection and charge-off accounts. They will not approve unless it has been paid in full and reflected that it had been paid in full on their credit reports.

Why do most mortgage lenders require collection accounts to be paid when Fannie Mae and Freddie Mac conventional loan accounts guidelines do not require the collection accounts to be paid on owner-occupant conventional loans? It is because mortgage lender overlay by the individual mortgage lender.

Overlays Versus Fannie Mae and Freddie Mac Conventional Loan Accounts Guidelines

Every lender can have higher lending guidelines above conventional loan collection accounts guidelines by Fannie Mae and Freddie Mac. These additional lending requirements are called lender overlays by mortgage lenders.

There are lenders with no overlays on conventional loan collection accounts guidelines. Gustan Cho Associates has no overlays on conventional loan collection accounts guidelines. We just go off Fannie Mae, and Freddie Mac agency conventional loan accounts guidelines.

Does Conventional Require Collections to be Paid Off?

Yes. The reason banks and many mortgage companies require that all unpaid outstanding collection accounts be paid in full when Fannie Mae and Freddie Mac do 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 to the minimum mortgage lending guidelines required by Fannie Mae and Freddie Mac.

Best Mortgage Lenders For Bad Credit With No Overlays

Gustan Cho Associates has no lender overlays on conventional loan collection accounts guidelines. If you are a home buyer or homeowner who needs a conventional loan but has outstanding collection accounts and non-mortgage charged-off accounts needing to qualify for conventional loans with collections, please call me at 800-900-8569.

Gustan Cho Associates is a mortgage broker licensed in 48 states with a national reputation of being able to do mortgage loans other lenders cannot do. Over 75% of our borrowers are folks who could not qualify at other lenders due to overlays, stress, last-minute loan denial, or not having the mortgage products.

At Gustan Cho Associates, we only market mortgage loans that exist and are possible at competitive rates. Besides government and conventional loans with no lender overlays, we offer hundreds of non-prime mortgage programs including non-QM and non-prime mortgages.

Text us for a faster response. You can also email us at gcho@gustancho.com and call at 800-900-8569. Gustan Cho Associates has no overlays on conventional loan collection accounts guidelines. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays to answer your phone calls and any questions you may have. Click here to apply for a lenders for bad credit with no overlays

FAQs About Conventional Loan Collection Accounts Guidelines

1. Can I Buy a House If I Have Accounts in Collections? When qualifying for a home loan, Fannie Mae, Freddie Mac, and HUD have specific guidelines regarding outstanding collection and charge-off accounts. Borrowers can typically qualify for conventional loans with unpaid outstanding collection accounts and charge-off accounts, subject to certain conditions.

2. Are Collections Considered in DTI? Yes, collections are typically included in the debt portion of lenders’ Debt-to-Income (DTI) ratio calculation. The DTI ratio evaluates a borrower’s ability to manage monthly payments and repay debts. Collections, such as overdue debts sent to collection agencies, are factored into this calculation and can impact borrowers’ eligibility for loans and interest rates.

3. Does FHLMC Require Collections to be Paid? Freddie Mac, a significant participant in the secondary mortgage market, does not require collections to be paid off when approving a mortgage. However, individual lenders may have their own policies regarding collections. Borrowers should communicate with potential lenders to understand their requirements and impact on the mortgage application process.

4. What Are the Guidelines for Collection Accounts on Investment Properties? For conventional loans on investment properties, stricter guidelines apply regarding unpaid collection accounts. Before or at closing, it’s necessary to pay in full any collection accounts that are either individual and unpaid with amounts equal to or exceeding $250 or a total of more than $1,000. These guidelines aim to mitigate risk for lenders and ensure the borrower’s financial stability.

5. Why Do Some Lenders Require Collection Accounts to be Paid Off? Many lenders impose additional requirements, known as overlays, on top of conventional loan guidelines set by Fannie Mae and Freddie Mac. These overlays often require collection accounts to be paid off before loan approval. While not mandated by Fannie Mae or Freddie Mac, these overlays reflect the lender’s risk tolerance and aim to reduce the likelihood of loan defaults.

This Conventional Loan Collection Accounts Guidelines article was updated on March 20th, 2024.