Fannie Mae Versus FHA Guidelines On Collections And Charge Offs

Gustan Cho Associates
2

Fannie Mae Versus FHA Guidelines On Collections And Charge Offs Was UPDATED And PUBLISHED On November 30th, 2019

FHA Versus Fannie Guidelines on Collections And Charge Off
Fannie Mae does not require collections and charged off accounts to be paid off on single family home loans

Fannie Mae Versus FHA Guidelines On Collections And Charge Offs are quite different:

Here are the differences:

  • Regards to credit
  • Debt to income ratio
  • Non-occupant borrowers
  • Collections
  • Charge offs
  • Waiting Period After Bankruptcy And Foreclosure
  • Mortgage Part Of Bankruptcy

In this article, we will cover and discuss Fannie Mae Versus FHA Guidelines On Collections And Charge Offs.

Fannie Mae Guidelines On Collections And Charge Offs

what are Fannie Mae Guidelines On Collections And Charge Offs

Most borrowers do not even consider conventional loans if they have collection accounts and outstanding charge off accounts.

  1. They figure that FHA Loans is the way to go if borrowers have outstanding collections and charge off accounts
  2. Can you qualify for a conventional loan with collection accounts and charge off accounts with a conventional loan?
  3. Homebuyers can qualify for home loans with collection and charge off  accounts
  4. However, Fannie Mae and Freddie Mac have tougher restrictions than HUD does when it comes to outstanding collections and charge off accounts
  5. Depending on the mortgage program, each program have different mortgage guidelines when it comes to unpaid collection accounts, charge offs, tax liens, late payments, and judgments

HUD Guidelines On Outstanding Collections And Charged Off Accounts

what are HUD Guidelines On Outstanding Collections And Charged Off Accounts

FHA Loans is known for its lenient guidelines on collections and charges offs:

  • With FHA Guidelines On Collections And Charge Offs, collection accounts and outstanding charge off accounts do not have to be paid to qualify for an FHA insured mortgage loan
  • FHA has different requirements on non-medical collections versus non-medical collections
  • Medical collections on FHA Guidelines on collection accounts are exempt from debt to income ratio calculations and the balance is immaterial
  • For example, here is a case scenario:
    • if borrowers have a total of $2,000 or more in non-medical collections, then HUD requires underwriters to take 5% of the outstanding unpaid non-medical collection balance
    • Borrowers do not have to pay the 5% of the outstanding collection accounts
    • But it is used as a hypothetical monthly debt

Home Loans With Outstanding Judgments And Tax Liens

what are Home Loans With Outstanding Judgments And Tax Liens

Borrowers can qualify for FHA Loans with tax liens, and judgments without having to pay them off completely:

  • However, borrowers need an agreed written payment plan from the Internal Revenue Service or judgment creditor
  • Need to have made three monthly payments
  • Three months of payments need to have been paid and you need to provide three months canceled checks or bank statements and you cannot pre-pay them upfront
  • Fannie Mae Mortgage Guidelines on Collections and Charge Offs are much more restrictive than FHA, VA, or USDA
  • We will do a Fannie Mae Versus FHA Guidelines and compare and contrast between the two
  • We will compare Fannie Mae Versus FHA Guidelines On Collections And Charge Offs and see if borrowers can qualify for both or one or the other.

Fannie Mae Versus FHA Guidelines On Collections And Charge Offs 

what are the Fannie Mae Versus FHA Guidelines On Collections And Charge Offs 

Borrowers can qualify for Conventional Loans with outstanding charge offs and collections.

  • Each mortgage program has its own requirements when it comes to collections and charge off accounts
  • FHA Loans has the most lax requirements on mortgage lending guidelines on collections and charge offs
  • Mortgage Guidelines on Collections and Charge Offs are most strict with Fannie Mae and Freddie Mac Conventional Loan with Collection Accounts
  • We do analysis and contrast on FHA versus Conventional Loan Guidelines on Collections, Charge Offs, and derogatory credit

Requirements For Fannie Mae And Freddie Mac With Collection Accounts

what are the Requirements For Fannie Mae And Freddie Mac 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 with balances and charge off, will need to be paid at or prior to closing the home loan for Conventional Loans whereas it does not need to be paid with FHA Loans.
  • Tax liens and judgments need to be paid at or prior to closing
  • Collection accounts of $250 or less or total aggregate unpaid balance of $1,000 or less may be exempt upon underwriter’s discretion on conventional loans

Collection Account Requirements On Conventional Loans

what are the Collection Account Requirements On Conventional Loans
  • Requirements On Conventional Loans With Collection Accounts are much stricter than FHA Loans
  • HUD mortgage guidelines do not require collection accounts to be paid
  • But with non-medical collections, any aggregate balance of over $2,000, 5% of the outstanding balance will be used to calculate debt to income ratios:
    • This holds true even though the borrower does not have to pay
  • Medical collection accounts are exempt with having to be paid or using a portion of the outstanding balance to calculate debt to income ratios
  • For non-medical collection accounts, if the aggregate unpaid balance of collection accounts is greater than $2,000, 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 borrower has $10,000 worth of unpaid collection accounts
    • then 5% of the unpaid $10,000 total aggregate collection account balance
    • or $500 will be used to calculate borrower’s debt to income ratios
  • This is the case even though the $500 per month does not have to be paid

Written Payment Agreement With Creditors

what is this Written Payment Agreement With Creditors

If outstanding collection accounts is of a large amount, HUD will allow a written payment agreement arrangement with creditors:

  • This is where borrowers can make a written payment agreement with the creditor with the collection accounts in lieu of the 5% collection account balance calculation
  • That new payment agreement that is agreed up will be used in lieu of the 5%
  • Here is a case scenario
    • borrower has a total collection account balance of $20,000
    • agrees with the creditor and sets up a written payment agreement with the creditor and/or collection agency for $200 per month
    • that $200 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
  • HUD mortgage guidelines are very generous with lending requirements for home buyers and homeowners wanting to refinance their current home loans with judgments, tax liens, and other liens such as mechanics liens
  • HUD, the parent of the Federal Housing Administration, 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
  • Three months of payments and seasoning is required
  • FHA Loans is the mortgage loan program of choice for borrowers with a lot of collections and charge off accounts

FHA Versus Fannie Mae Guidelines On Collections And Charge Offs For Conventional Loan With Derogatory Items

what are the FHA Versus Fannie Mae Guidelines On Collections And Charge Offs For Conventional Loan With Derogatory Items

Fannie Mae Versus FHA Guidelines On Collections And Charge Offs:

Conventional guidelines are much different than FHA lending guidelines with regards to:

  • Outstanding collection accounts, charge offs, tax liens, and judgments.
  • All unpaid collection accounts as well as charge offs.
  • Judgments and Tax Liens.
  • Outstanding collection accounts of $250 or less or total aggregate unpaid balance of $1,000 or less may be exempt upon underwriter’s discretion on investment properties

This BLOG On Fannie Mae Versus FHA Guidelines On Collections And Charge Offs Was UPDATED On November 18th, 2019

2 Comments
  1. Gustan Cho, NMLS 873293 says

    All loan programs do not require charged offs and collection accounts to be paid off on owner occupied home financing. Reason why many lenders require that charge off accounts and collections be paid off is not due to agency mortgage guidelines but because the lender has overlays. Gustan Cho Associates is one of a few national lenders who has no lender overlays on government and conventional loans. We are a true no overlay lender. Collection and charge off accounts do not have to be paid off on FHA, VA, USDA and conforming loans.

Leave A Reply

Your email address will not be published.

CALL NOW