In this blog, we will discuss and cover Fannie Mae-Freddie Mac charge-off guidelines on conventional loans. Lately, Gustan Cho Associates have been contacted many times about conventional mortgages and charged-off accounts. We have received this call from prospective borrowers as well as many loan officers, which shows us we need to educate our readers on this topic.
Conventional loans have different collection and charged-off accounts guidelines on primary homes, second homes, and investment properties. You do not have to pay outstanding collections and charged-off accounts on primary owner-occupant primary home conventional loans.
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 we have been asked are. Do the charge-offs need to be paid before closing? Do you need to count a 5%payment of the charged-off amount against your monthly debt to income ratio? For answering these two questions, it is important to know that the guidelines are different for mortgage charged-off accounts and non-mortgage charged-off accounts. Since non-mortgage charged-off accounts are more common, we will discuss those first.
Single-Family Home Mortgage Guidelines
For one-unit PRIMARY residences, borrowers are not required to pay off outstanding collections or non-mortgage charged-off accounts. The amount you owe does not matter. You DO NOT have to pay them off. For two to four-unit owner-occupied property (or second homes), collections and non-mortgage charge-off accounts totaling more than $5,000, must be paid in full before closing or at closing. For investment properties, collection and non-mortgage charge-off accounts equal to or greater than $250 and accounts that total more than $1,000 MUST be paid in full before closing to at closing.
Fannie Mae-Freddie Mac Charge-Off Guidelines to Qualify for Conventional Loans
We will now discuss charged-off mortgage counts. The guidelines are different if the charged-off account is a mortgage tradeline. A mortgage tradeline refers to all mortgages including first liens, second liens, home improvement loans, home equity lines of credit, and manufactured housing mortgage loans. The AUS will identify these accounts as a charge-off if there is a MOP code of “9” on the AUS findings. There will not be information indicating the account may also be subject to a foreclosure, deed-in-lieu of foreclosure, or pre-foreclosure sale(codes 8, DIL, or PFS on AUS).
AUS Findings on Housing Events
When the AUS identifies a charge off on a mortgage tradeline, the lender must document the event was completed four or more years from the disbursement date of the new loan. Or two or more years from the disbursement date of the new loan if the lender confirms the loan meets extenuating circumstance guidelines. Take it from us, extenuating circumstances rarely work. Extenuating circumstances are very difficult to approve.
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 rules of thumb are it needs to be over years ago! (Please contact us with questions, we understand how confusing these guidelines are)
Fannie Mae-Freddie Mac Charge-Off Guidelines On 5% Hypothetical Payment
Now back to the second question, do you need to count 5% of the charge-off amount against your monthly debt to income ratio? The short answer is no. Depending on the type of home and occupancy, you may not need to pay for the collection at all. The majority of conventional loans are for primary residences which do not require you to pay off the charged-off amount before closing.
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
Many lenders will have LENDER OVERLAYS regarding charged-off accounts. Many lenders will require you to pay them off before closing even though that is not a Fannie Mae guideline. Gustan Cho Associates does not have any lender overlays. We are direct lenders and do not add any additional guidelines above and beyond the agency requirements. If you have questions surrounding conventional mortgages and charge-offs, please contact Mike Gracz at 630-659-7644 or text Mike for a faster response. Or email us at email@example.com. Either I or one of our highly-skilled loan officers will be there to assist you.
September 24, 2022 - 3 min read