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Fannie Mae Guidelines On Conventional Loan With Collection Accounts

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Fannie Mae Guidelines On Conventional Loan With Collection Accounts

This BLOG On Fannie Mae Guidelines On Conventional Loan With Collection Accounts Was UPDATED On June 28th, 2018

Can you qualify for conventional loan with collection accounts?

  • Home buyers can qualify for home loans with collection accounts
  • Every mortgage loan program have different mortgage lending guidelines when it comes to unpaid collection accounts, charge offs, tax liens, and judgments
  • FHA Loans has the most lenient mortgage lending guidelines with regards to unpaid collection accounts, charge offs, tax liens, and judgments
  • Guidelines on Conventional Loan with Collection Accounts are probably the most strict out of all mortgage loan programs
  • We will do a comparison and contrast on conventional loan with collection accounts and FHA Loan with collection accounts

Requirements For Conventional Loan With Collection Accounts

Conventional lending guidelines are much different than FHA mortgage lending guidelines with regards to unpaid collection accounts, charge offs, tax liens, and judgments.

  • All unpaid collection accounts, charge offs, does not need to be paid per Fannie Mae Guidelines on owner occupant homes
  • Tax liens and judgments need to be paid at or prior to closing
  • There is a maximum on the amount of outstanding collections borrowers may have on investment property loans per Fannie Mae Guidelines On Collections

Fannie Mae and Freddie Mac does not require Borrowers to pay outstanding collections and charged off accounts on single unit owner occupant homes.  It does not matter on the outstanding balance of collections and/or charged offs.

  • However, home buyers who are purchasing two to four unit owner occupied primary and/or second homes must pay off any outstanding collection accounts and/or charge off accounts if the amount is over $5,000
  • Investors purchasing investment homes must pay off individual collection accounts and/or charge off accounts that is equal or greater than $250
  • Collection accounts that total more than $1,000 needs to be paid in full on conventional investment loans

Requirements For FHA Loan With Collection Accounts

FHA mortgage lending guidelines does not require collection accounts to be paid.

  • Medical collection accounts are totally exempt
  • For non-medical collection accounts here is what the guidelines are:
    • if the aggregate unpaid balance of collection accounts is greater than $1,000, then 5% of the unpaid collection account balance will be used towards debt to income calculations
  • For example, here is a case scenario:
    • if a mortgage loan borrower has $20,000 worth of unpaid collection accounts
    • then 5% of the unpaid $20,000 total aggregate collection account balance, or $1,000 will be used to calculate the mortgage loan borrower’s debt to income ratios
    • This is the case even though the $1,000 per month does not have to be paid
    • FHA also allows a written payment agreement arrangement with unpaid collection accounts in lieu of the 5% collection account balance calculation
  • For example, if the mortgage loan borrower has a total unpaid collection account balance with a collection agency and/or creditor of $20,000
    • makes a written payment agreement with the creditor and/or collection agency for $300 per month
    • that $300 per month will be used in lieu of the 5% of the $20,000, or $1,000, in the calculation of debt to income ratios

Judgment And Tax Liens With FHA Loans

FHA mortgage lending guidelines are very generous with lending requirements for home buyers and homeowners wanting to refinance their current home loans with the following:

  • judgments
  • tax liens
  • other liens such as mechanics liens

FHA allows mortgage loan borrowers who have judgments and tax liens to set up a written payment agreement with the judgment creditor or the Internal Revenue Service. Outstanding tax liens and judgments do not have to be paid off as long as they have a three month seasoning with making payments. Borrowers can qualify for FHA, VA, USDA, and Conventional Loans with written payment agreement and three months of payment seasoning.

FHA Loan Is The Way To Go If You Have Collection Accounts

Borrowers with unpaid collection accounts, charge offs, judgments, and tax liens, FHA Loan programs may be the best bet in getting an automated underwriting system approval. It is much easier to get an approve/eligible per automated underwriting system approval on FHA Loans with collections and charged off accounts than FHA and/or VA Loans. Government loans has more lax mortgage lending guidelines.

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