2018 FHA Charge Off Guidelines To Qualify For FHA Loans

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2018 FHA Charge Off Guidelines To Qualify For FHA Loans

This BLOG On 2018 FHA Charge Off Guidelines To Qualify For FHA Loans Was UPDATED On February 13th, 2018

Many home buyers believe that all banks and lenders have the same FHA Charge Off Guidelines To Qualify For FHA Loans. Not all lenders have the same FHA Requirements.  One lender may require borrowers to pay outstanding collections and charge offs and another lender may not. 2018 FHA Charge Off Guidelines state that a borrower does not need to pay off or settle a charge off account to qualify for FHA Home Loans.

Per  FHA Charge Off Guidelines To Qualify For FHA Loans, there are no limits on how high the charge off account is for the borrower to qualify for a FHA Loan.

  • The United States Housing and Urban Development, known by most of us as HUD, is the parent of the Federal Housing Administration, known as FHA
  • HUD is the government organization that sets the FHA Guidelines
  • One of HUD’s mission is to promote home ownership in the United States
  • HUD sets the mortgage lending guidelines for FHA Loans

Role Of FHA

The Federal Housing Administration is a government agency under the U.S. Department of Housing and Urban Development:

  • FHA is not a lender nor does it originate, fund, or service FHA Loans
  • FHA is a government agency that acts as an insurer for banks and/or mortgage lenders that originate and fund FHA Loans
  • FHA insures lenders in the event Borrower defaults on their FHA Loan and the property goes into foreclosure
  • Banks and FHA Lenders originate and fund FHA Loans with little down payment and loose credit requirements
  • Due to FHA promoting home ownership and the guarantee HUD offers, lenders are able to offer low down payment home loans at low mortgage rates
  • FHA realizes that many hard working Americans had at one time or another gone through financial hardship
  • FHA is very understanding in giving people second chances

Qualifying For FHA Home Loans After Bankruptcy

Home Buyers can qualify for FHA Home Loans after bankruptcy. However, there are mandatory waiting period requirements.

The philosophy under FHA’s eyes is that people deserve a second chance to have the opportunity to become home owners after the following:

  • Chapter 7 Bankruptcy : 
    • There is a two year waiting period after a Chapter 7 Bankruptcy Discharge Date to qualify for a FHA Loan
  • Chapter 13 Bankruptcy: 

Qualifying For FHA Loans After Housing Event

Home buyers can qualify for FHA Loans after housing event after meeting mandatory waiting period requirements:

  • Foreclosure: 
    • There is a three waiting period from the recorded date of a foreclosure or the date of the sheriff’s sale to qualify for a FHA Mortgage
  • Deed In Lieu Of Foreclosure: 
    • There is a three year waiting period from the recorded date of a deed in lieu of foreclosure to qualify for a FHA Loan
  • Short Sale: 
    • There is a three year waiting period from the short sale date of the property which is reflected on closing statement of the short sale to qualify for a FHA Loan

FHA Loans With Bad Credit

Home Buyers with bad credit can qualify for FHA Loans. However, in order to get an approve/eligible per Automated Underwriting System approval, timely payments in the past 12 months is often required.  AUS will approve with one or two late payments in the past 12 months.

  • Periods Of Bad Credit: 
    • FHA understands borrowers having periods of bad credit and/or derogatory credit but FHA wants borrowers to have re-established credit and timely payment history for past 12 months
  • Unpaid Collection Accounts: 
    • Borrowers do not have to pay off outstanding unpaid collection accounts to qualify for a FHA Loan
  • Charge Off Accounts:’
    •  2018 FHA Charge Off Guidelines state that borrowers do not have to pay any outstanding charge off accounts to qualify for a FHA Loan

Qualifying For FHA Loans With Judgment And Tax Liens

HUD allows for borrowers with qualify for FHA Loans with outstanding judgments and tax liens with written payment agreements:

  • Tax Liens:
    •  FHA Allows borrowers to qualify for a FHA Loan without having to pay off tax liens
    • However, a written payment agreement is required and three month’s of canceled checks and payments are required
    • Borrowers cannot pre-pay the three months payments upfront once they get a written payment agreement
    • Three months payments needs to be seasoned for the three months
  • Judgments: 
    • FHA allows you to qualify for FHA Loan with outstanding judgment without having it to be paid in full
    • Need written payment agreement with the judgment creditor
    • Need three months of canceled checks
    • As with tax liens, borrowers cannot pre-pay the three months payment upfront once they execute a written payment agreement
    • Three months seasoning is required
  • Other Credit And Financial Issues Due To Extenuating Circumstances: 
    • FHA is fairly lenient with regards to qualifying for a FHA Loan
    • If the borrower cannot get an approve/eligible per Automated Underwriting System, most FHA Lenders can downgrade FHA Loan Application to a manual underwriting
    • All manual underwrites require 12 months timely payment
    • All manual underwriting requires verification of rent

FHA does not require borrowers to pay off outstanding collection accounts or charge off accounts to qualify for a 3.5% down payment home purchase home under 2018 FHA Charge Off Guidelines and outstanding Collections Guidelines. FHA Loans are the best loan program for borrowers who have had prior bad credit.

Updated 2018 FHA Charge Off Guidelines To Qualify For FHA Loans

Why is it that many borrowers consult with loan officers at various lending institutions and are told that they do not qualify for a FHA Loan because they have outstanding unpaid collection accounts?

Here are some of the answers many borrowers with outstanding collection accounts get when they visit loan officers at banks and mortgage lenders:

  • Borrowers cannot qualify for a FHA Loan if with outstanding unpaid collection accounts
  • Borrowers are told by lenders with overlays to pay off collection accounts and need to wait until it reflects on credit report
  • Some banks have overlays where they require to have collection account paid in full and seasoned for two years
  • Other lenders have lender overlays where the maximum amount of total collection account balance borrowers can have on credit report is not to be greater than $5,000

All of the above answers from loan officers at banks and lending institutions are not FHA Guidelines BUT are their own FHA Lender Overlays. Home Buyers can qualify for FHA Loans with outstanding collections and charge offs per FHA Charge Off Guidelines To Qualify For FHA Loans. The Gustan Cho Team at USA Mortgage is a direct lender with no overlays on FHA Loans.

What Are FHA Lender Overlays?

A mortgage lender does not need to approve borrowers for FHA Loans even though borrowers may meet all FHA Guidelines under HUD 4000.1 FHA Handbook. A lender may set higher lending requirements that is above and beyond of those of FHA Guidelines.

These additional higher lending requirements are called lender overlays:

  • These additional mortgage lending requirements that are above and beyond of FHA Mortgage Lending Guidelines are called FHA Lender Overlays 
  • 2018 FHA Charge Off Guidelines state that borrowers do not have to pay off any charged off collection accounts no matter how large the charge off account balance is
  • However, many mortgage lenders have FHA Lender Overlays on charge off collection accounts where they will require charge off accounts to be paid off in order for the borrower to qualify for a FHA Loan
  • Other FHA mortgage lenders will have caps on charge off accounts
  • For example, many banks and smaller sized mortgage bankers will have requirements that borrowers can have charge off collection accounts up to $5,000 maximum to qualify for a FHA Loan

Home Buyers and/or Homeowners who need to qualify for home loans with a direct lender with zero lender overlays on government and conventional loans, please contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com.  You do not have to pay off outstanding charge off collection accounts to qualify for a FHA Loan.

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