This BLOG On FHA Collections Guidelines To Qualify For FHA Home Loans Was UPDATED And PUBLISHED On November 28th, 2019
FHA Collections Guidelines For Home Buyers
FHA Collections Guidelines for mortgage loan borrowers were just released.
- FHA does not require borrowers to pay off outstanding collection accounts to qualify for FHA Loans
- Many home buyers are told by lenders that they do not qualify for a FHA Loan due to outstanding collection accounts
- But that is not because of FHA Collections Guidelines
- It is due to the individual mortgage lender overlays
In this article, we will cover and discuss FHA Collections Guidelines To Qualify For FHA Home Loans.
Mortgage Lender Overlays
Banks and mortgage lenders can have their own set of lending guidelines called overlays:
- Mortgage Overlays are additional mortgage requirements that are on top of the FHA Collections Guidelines
- Even though HUD, the parent of FHA, does not require outstanding collection accounts to be paid off, the individual bank or mortgage company may require that all outstanding collection accounts be paid
- Borrowers told they do not qualify for a FHA Loan by a bank or mortgage company due to having outstanding unpaid collection accounts, please contact us at 262-716-8151 or text us for faster response
- Or email us us at email@example.com
- Gustan Cho Associates has no FHA Lender Overlays on outstanding collection account
- We just go off the minimum FHA mortgage lending guidelines
- Many of my borrowers have unpaid outstanding collection accounts
- We have no issues in qualifying and closing on their FHA home loans
On this article, we will be discussing the 2019 FHA Collection Guidelines and how mortgage underwriters classify the various types of collection accounts and how you can qualify for a FHA Loan with unpaid outstanding collection accounts.
2019 FHA Collections Guidelines On Non-Medical Versus Medical Collections
2019 FHA Collections Guidelines classifies collection accounts into four categories
- Medical Collection Accounts
- Non-Medical Collection Accounts
- Non-Mortgage Charge Off Accounts
- Mortgage Charge Off Accounts
FHA Does Not Require Collections To Be Paid To Qualify For FHA Loans
As mentioned earlier, 2019 FHA Collections Guidelines does not require borrowers to pay off unpaid outstanding collection accounts to qualify for FHA Loans.
- With unpaid outstanding medical collection accounts, debt to income ratios are excluded
- FHA mortgage underwriter can ignore medical collection accounts with unpaid outstanding medical collection account balances no matter how much the unpaid outstanding medical collection account balance is
- However, with non-medical unpaid outstanding collection accounts with balances of greater than $2,000 (the sum of all non-medical collection accounts with balances), FHA requires that 5% of the outstanding unpaid non-medical collection account balance be used to calculate the borrower’s debt to income ratio
Let’s take a case scenario where a borrower has $10,000 in unpaid outstanding non-medical collection account balance on all of their collection accounts:
- FHA requires underwriters take 5% of the $10,000 in unpaid collection balance
- or $500 per month
- use that as a hypothetical monthly debt obligation even though borrowers does not have to make any payments to the collection agencies and/or creditors
Credit Disputes Prohibited During Mortgage Process
Borrowers cannot have credit disputes on non-medical collection accounts with unpaid balances of over $1,000 (total outstanding collection account balances on credit report):
- Borrowers are allowed to have credit disputes on non-medical collection accounts with zero balances
- Medical Collections are exempt from credit disputes
The third category on collection accounts is non-mortgage charge off accounts.
- FHA ignores charge off accounts
- Treats charge off accounts like medical collection accounts
- FHA borrowers do not have to pay off charge off accounts no matter what the unpaid outstanding collection account balance is
- Borrowers cannot have credit dispute on any charged off collection accounts
- All credit disputes on charged off accounts needs to be removed before proceeding with the mortgage process
The fourth and final category on collection accounts are mortgage charge off accounts.
- This applies for first and second mortgage charge off accounts
- FHA does not require borrowers to pay off mortgage charge off accounts
- FHA ignores mortgage charge off accounts
- However, there is a three year waiting period to qualify for a FHA Loan after a mortgage charge off account
- This applies for first and second mortgages
Charge Off Accounts With Balances
I get so many borrowers who come to me because they were told that they do not qualify by banks and/or other mortgage lenders because they have charge off accounts with outstanding balances on their credit report.
- Unfortunately, the mortgage loan originators who are telling potential borrowers that they do not qualify for a FHA Loan due to charge off accounts with balances do not know how to read credit reports and FHA Guidelines On Charge Off Accounts
- Most charge off accounts on credit reports have outstanding unpaid balances reported and that should not matter
- The reason that the outstanding unpaid collection balance is reported on the credit report is because that is the amount the creditor has charged off
- On another note, many mortgage loan originators will tell potential mortgage loan applicants that they do not qualify for a FHA Loan after a mortgage charge off account with balance
- These inexperienced mortgage loan originators tell FHA borrowers that unless they pay off the mortgage charge off account and get a zero balance letter by lenders reporting the mortgage charge off account and that zero balance is reported on their credit report that they will not qualify for a FHA Loan
- This is not true
- Most, if not all, mortgage charge off accounts will report a balance on the credit report and this is no issue in qualifying for a FHA Loan
Borrowers who have been told that you do not qualify for a FHA Loan due to collection accounts with outstanding unpaid balances or mortgage charge off accounts with balances, please do not hesitate to contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at firstname.lastname@example.org. Our team of licensed and support personnel will help borrowers secure a FHA Loan and make the American Dream Of Home Ownership become a true reality.