Do I Have To Pay Collections For FHA Loan

Do I Have To Pay Collections For FHA Loan?

A large percentage of my borrowers are mortgage borrowers who were turned down by other banks and mortgage companies because they had outstanding collection accounts and/or charge off accounts. Most of my borrowers are familiar with FHA Guidelines On Collection Accounts and realize that FHA does not require mortgage loan borrowers to pay off outstanding collection accounts and/or charge off accounts to qualify for a FHA Loan. It is stated in black and white on HUD 4000.1 FHA Handbook that FHA mortgage loan borrowers do not have to pay any outstanding collection accounts and charge off accounts no matter what the unpaid outstanding balance is. They often wonder why they are told that they do not qualify with the bank or mortgage lender they just visited to get pre-approved for a FHA Loan and are told that unless they pay the outstanding collection accounts and/or charge off accounts, they are out of luck. Most often, these borrowers who get turned down by other lenders due to outstanding collection accounts and charge off accounts are not told that they may not qualify with their particular mortgage lender but may qualify with another FHA approved mortgage lender with no lender overlays on collection accounts. These borrowers often due their own research online for mortgage lenders who have no lender overlays such as myself and reach out to me about qualifying for a FHA Loan with outstanding unpaid collection accounts and charge off accounts. Do I Have To Pay Collections For FHA Loan? The answer is NO. You do not have to pay outstanding collection accounts or charge off accounts to qualify for FHA Loans.

Do I Have To Pay Collections For FHA Loan: How FHA Views Collections And Charge Offs

FHA does not require FHA mortgage borrowers to pay off outstanding collection accounts and charge off accounts. However, unpaid non-medical collection accounts with outstanding collection balances can affect a FHA mortgage borrower when it comes to qualifying for debt to income ratios. FHA classifies collection accounts into three categories:

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

FHA does not require non-medical collection accounts with outstanding balances to be paid off. However, if the total sum of the outstanding unpaid non-medical collection accounts is more than $2,000, then FHA requires that the mortgage lender take 5% of the outstanding non-medical collection account balance and use that figure as a monthly debt payment of the mortgage borrower. The FHA borrower does not have to make any monthly payments on the 5% of the outstanding unpaid collection account balance, however, it will be used as a paper debt and used for DTI calculations.

If the non-medical collection account balance is a substantial amount, then 5% of the outstanding balance can be a significant large number where it may disqualify the borrower because the DTI will exceed the maximum allowed per FHA Guidelines On Debt To Income Ratios the borrower can arrange a written payment agreement with the creditor and/or collection agency and whatever the monthly payment agreement is, that figure will be used in lieu of the 5% of the outstanding collection account balance. Let’s take a case scenario where a borrower has $30,000 worth of non-medical collection accounts. A borrower can qualify for a FHA Loan without having to pay the $30,000 outstanding collection account balance nor do they need to make any payment arrangements. However, 5% of the $30,000 outstanding collection account balance, or $1,500, will be used as a monthly debt payment by the mortgage loan underwriter even though the mortgage borrower does not have to pay anything every month. $1,500 is a large monthly debt obligation payment and unless the borrower makes substantial income, this $1,500 monthly debt payment on paper may disqualify the FHA borrower because it may exceed the maximum debt to income ratio requirement of 56.9% DTI allowed for FHA borrowers with credit scores of greater than 620 FICO credit scores. FHA maximum debt to income ratios are capped at 43% DTI for borrowers with credit scores under 620 FICO. However, if the borrower were to make a written payment agreement with the creditor and/or collection agency for $200 per month, then the $200 per month per the written payment agreement will be used in lieu of the $1,500 per month debt payment in the calculations of the borrower’s debt to income ratios.

Medical collection accounts and charge off accounts are exempt from debt to ratio calculations no matter how large the outstanding unpaid medical collection account balance is and no matter how much the charge off amount is. It does not matter whether or not the charge off account is a medical charge off account or non-medical charge off account.

Do I Have To Pay Collection Accounts For FHA: Why Do Most Lenders Require Collections Paid Off

Unfortunately, most FHA mortgage lenders will require that collection accounts and charge off accounts to be paid off before you can qualify with them even though HUD Guidelines does not require that outstanding collection accounts be paid off.  Other mortgage lenders may have a cap on the collection account balance such as you cannot have any outstanding collection account balances and/or charge offs that is greater than $5,000. It is not illegal for any bank or mortgage lender to ask for borrowers to have satisfied collection accounts and charge off accounts even though FHA Guidelines on Collection Accounts do not require that borrowers pay off collection account balances and charge off account balances. Mortgage lenders can have additional FHA Requirements that exceeds the minimum FHA mortgage lending guidelines. This additional FHA requirements imposed by banks and mortgage lenders is called FHA Lender Overlays . If you consult with a bank or mortgage lender and are told that you do not qualify for a FHA Loan because you have outstanding collection accounts and charge off accounts with outstanding unpaid balances, please contact me at 262-716-8151 or email me at gcho@gustancho.com. I do not require you to pay off any outstanding collection accounts or charge off accounts. I do not have any FHA Lender Overlays on any FHA Loans.  I am available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions and get you pre-approved on a FHA Loan or any other mortgage loan program that we offer such as VA Loans, USDA Loans, Conventional Loans, FHA 203k Loans, Reverse Mortgages, Non-Conforming Loans, Jumbo Mortgages, and Commercial Loans.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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