Fannie Mae-Freddie Mac Charge-Off Guidelines On Conventional Loans

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This blog post will explore the Fannie Mae-Freddie Mac charge-off guidelines applicable to conventional loans. Gustan Cho Associates has recently received numerous inquiries regarding conventional mortgages and charged-off accounts. These queries have come from prospective borrowers and loan officers, emphasizing the importance of educating our readers on this topic.

The Fannie Mae-Freddie Mac Charge-Off Guidelines outline distinct criteria for handling collection and charged-off accounts on conventional loans for primary residences, secondary homes, and investment properties. For primary owner-occupant conventional loans on primary homes, outstanding collections and charged-off accounts are not mandatory for payment.

Conventional loans are referred to as conforming loans. This is because conventional loans need to conform to Fannie Mae and Freddie Mac Agency Guidelines in order for Fannie/Freddie to purchase these loans on the secondary market. This is a gray area and finding the actual guideline is quite difficult. In the following sections, we will cover the Fannie Mae-Freddie Mc Charge-Off Guidelines on conventional loans. 

Common Questions On Conventional Loans

The specific questions raised pertain to the Fannie Mae-Freddie Mac Charge-Off Guidelines. Is it obligatory to resolve charge-offs before the closing? Should a 5% payment of the charged-off amount be factored into your monthly debt-to-income ratio computations? To tackle these inquiries, it is essential to recognize that the guidelines differ between charged-off accounts linked to mortgages and those not related to mortgages. As non-mortgage charged-off accounts are more prevalent, let’s begin our conversation by addressing them.

Single-Family Home Mortgage Guidelines

In adherence to the Fannie Mae-Freddie Mac Charge-Off Guidelines, specific provisions are outlined concerning the treatment of outstanding collections and non-mortgage charged-off accounts based on the nature of the property. The guidelines stipulate exemptions for borrowers of primary residences with a single unit, where the settlement of such accounts is not mandatory. Regardless of the owed amount, borrowers are not obligated to clear outstanding collections or non-mortgage charged-off accounts for these properties.

However, a differentiated approach is established for owner-occupied properties with two to four units or second homes. In such cases, collections and non-mortgage charge-off accounts that surpass the threshold of $5,000 necessitate full settlement either before or at the time of closing. This nuanced requirement aligns with the Fannie Mae-Freddie Mac Charge-Off Guidelines, ensuring a comprehensive financial evaluation for properties under this category.

For investment properties, a more stringent criterion is applied. Accounts-related to collections and non-mortgage charge-offs, reaching or surpassing $250 and those with a cumulative value exceeding $1,000, must be resolved in full. This obligation is specified by the Fannie Mae-Freddie Mac Charge-Off Guidelines and underscores the importance of addressing financial liabilities associated with collections and non-mortgage charge-offs for investment properties. The resolution of these accounts is required either before or during the closing process, contributing to a thorough risk assessment following the guidelines set forth by Fannie Mae and Freddie Mac.

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Fannie Mae-Freddie Mac Charge-Off Guidelines to Qualify for Conventional Loans

We will delve into the particulars of mortgage accounts that have been charged off, focusing on the guidelines applicable when dealing with a mortgage tradeline that has been classified as charged off. The phrase “mortgage tradeline” encompasses various mortgage types, such as first and second liens, home equity lines of credit, home improvement loans, and manufactured housing mortgage loans.

When evaluating these mortgage tradelines, the Automated Underwriting System (AUS) is pivotal in identifying charged-off accounts. Specifically, an account receives a charge-off designation if the AUS findings reveal a Mortgage Origination Program (MOP) code of “9.” This distinct code signals the automated system’s recognition of a charged-off status.

It is crucial to note that, within the framework of these guidelines, the focus remains on the charged-off status, and the AUS findings do not provide explicit information suggesting potential additional actions such as foreclosure, deed-in-lieu of foreclosure, or pre-foreclosure sale. In other words, codes “8,” “DIL,” or “PFS” on the AUS do not accompany the charge-off designation, ensuring clarity in the assessment process. This deliberate separation underscores the importance of adhering to the Fannie Mae-Freddie Mac Charge-Off Guidelines in managing mortgage tradelines.

AUS Findings on Housing Events

When utilizing the Automated Underwriting System (AUS) and encountering a charge-off on a mortgage tradeline, it is imperative for the lender to meticulously document that the event transpired four or more years before the disbursement date of the new loan. Alternatively, if the lender can affirm that the loan adheres to the extenuating circumstance guidelines, a charge-off completed two or more years from the disbursement date of the new loan may be acceptable. Notably, relying on extenuating circumstances can be challenging, as their approval is infrequent and demanding.

It is essential to note that relying on extenuating circumstances is a complex and seldom successful approach. The approval process for such cases is known to be rigorous, making it crucial for lenders to exercise caution when considering this avenue. The Fannie Mae-Freddie Mac charge-off guidelines underscore the importance of thorough documentation in navigating these situations, ensuring compliance, and minimizing risks associated with charge-off scenarios flagged by the AUS.

Extenuating Circumstances

It has been a long time since we have been able to get an extenuating circumstance approved. Long and short, on charged-off mortgage accounts, we must document where the event happened. The rule of thumb is it needs to be over years ago! (Don’t hesitate to get in touch with us with questions; we understand how confusing these guidelines are.)

Fannie Mae-Freddie Mac Charge-Off Guidelines On 5% Hypothetical Payment

Revisiting the second query: Is incorporating 5% of the charge-off amount into your monthly debt-to-income ratio necessary? In succinct terms, no. The responsibility to settle the collection might not be applicable at all, contingent on the characteristics of the home and its occupancy. It’s worth noting that most conventional loans are specifically earmarked for primary residences. Consequently, the obligation to settle the charged-off amount before closing is not deemed mandatory in such cases. Now, let’s delve into the Fannie Mae-Freddie Mac Charge-Off Guidelines to understand the stipulations surrounding this aspect comprehensively.

For more information please see: http://www.fanniemae.com/content/guide/selling/b3/5.3/09.html

Lender Overlays Versus Fannie Mae-Freddie Mac Charge-Off Guidelines

Numerous lenders often impose their LENDER OVERLAYS related to charged-off accounts, deviating from the standard Fannie Mae guidelines. It is common for many lenders to insist on settling such accounts before closing, a requirement that does not align with Fannie Mae’s stipulations. At Gustan Cho Associates, however, we take pride in operating as direct lenders without any lender overlays. Our commitment is to adhere strictly to the agency requirements without introducing additional guidelines.

Unlike some lenders, Gustan Cho Associates strives to streamline the mortgage process by eliminating unnecessary hurdles. We understand that charge-offs on your credit report can be a concern, and we want to assure you that our approach is per Fannie Mae guidelines.

If you have any questions or uncertainties about traditional home loans and what happens when a lender writes off your debt, we encourage you to contact our expert, Alex Carlucci. You can reach Alex at 800-900-8569 for a quick response via text or email us at alex@gustancho.com.

Whether you speak with Alex or one of our highly skilled loan officers, we’re here to provide comprehensive assistance and guide you through the complexities of the mortgage process. The team at Gustan Cho Associates is available 7 days a week, on evenings, weekends, and holidays.
Your satisfaction and understanding of the Fannie Mae-Freddie Mac Charge-Off Guidelines are our top priorities.

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FAQ: Fannie Mae-Freddie Mac Charge-Off Guidelines On Conventional Loans

What are the Fannie Mae-Freddie Mac Charge-Off Guidelines, and why are they important for conventional loans? The Fannie Mae-Freddie Mac Charge-Off Guidelines outline criteria for handling collection and charged-off accounts on conventional loans. Conventional loans must adhere to these guidelines to be eligible for purchase by Fannie Mae and Freddie Mac on the secondary market.

Is it mandatory to resolve charge-offs before closing on a conventional loan? For primary residences with a single unit, borrowers are not obligated to clear outstanding collections or non-mortgage charged-off accounts. However, for owner-occupied properties with two to four units or second homes, collections and non-mortgage charge-off accounts exceeding $5,000 must be settled before or at closing. Investment properties have stricter requirements, with accounts over $250 or exceeding $1,000 cumulatively needing resolution.

Should 5% of the charged-off amount be factored into monthly debt-to-income ratio computations? No, incorporating 5% of the charge-off amount into the debt-to-income ratio is not mandatory, especially for primary residences. The obligation to settle charged-off amounts before closing depends on property characteristics and occupancy.

How are charged-off mortgage accounts assessed under the guidelines? The Automated Underwriting System (AUS) identifies charged-off mortgage tradelines. Events must have occurred four or more years before the new loan disbursement, or extenuating circumstances can be considered if the event happened two or more years prior. However, approval for extenuating circumstances is rare and challenging.

How do lender overlays affect Fannie Mae-Freddie Mac Charge-Off Guidelines? Some lenders impose additional requirements, such as settling accounts before closing, which do not align with Fannie Mae guidelines. Gustan Cho Associates operates without lender overlays, strictly following agency requirements.

Where can I find more information about these guidelines? You can refer to the official Fannie Mae guidelines at this link for detailed information.

This blog about Fannie Mae-Freddie Mac Charge-Off Guidelines On Conventional Loans was updated on January 29th, 2024.

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