FHA Guidelines On Bad Credit With Outstanding Collections


This BLOG On FHA Guidelines On Bad Credit With Outstanding Collections Was UPDATED On December 11th, 2018

What are the FHA guidelines for bad credit with unique collections

HUD, the parent of FHA, has the most lenient mortgage guidelines when it comes for home loan borrowers with bad credit.

  • FHA Guidelines On Bad Credit does not require potential home buyers to pay off the outstanding collection and charge off accounts
  • Each type of bad credit item is viewed differently and ranked by the order of most damaging to least damaging by lenders

Mortgage lenders pull three credit reports from the three credit reporting agencies.

  1. TransUnion
  2. Experian
  3. Equifax

In this article, we will cover and discuss FHA Guidelines On Bad Credit With Outstanding Collections.

Key FHA Guidelines On Bad Credit

Before going about repairing credit, consult with a loan officer.

  • There are many times where credit repair can do more damage than good during the mortgage process
  • Credit Disputes are not allowed during the mortgage process
  • All credit disputes need to be retracted prior to issuance of pre-approvals with a few exemptions

In the following paragraphs, we will take the most damaging negative credit item to the least damaging. We will summarize on how lenders view them when qualifying a mortgage loan candidate for a bad credit home loan.

FHA Guidelines On Bad Credit And Bankruptcy

Bankruptcies will definitely have devastating effects on credit scores.

  • Whether it is a Chapter 7 or Chapter 13 Bankruptcy, credit scores will most likely drop over 150 points to 200 or more points
  • However, this sudden plummet in credit scores is temporary
  • Consumer credit scores will go back up once the bankruptcy ages
  • To expedite boosting credit scores, consumers can add positive credit such as secured credit cards as soon as possible after a Bankruptcy discharge
  • However, a bankruptcy will get a person a fresh start on life and debt-free
  • There are bad credit home loan specialists like myself that can help borrowers with a prior bankruptcy

HUD requires a two year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA Loans.

Borrowers Can Qualify For FHA Loans During And After Chapter 13 Bankruptcy

Can borrowers qualify for FHA loans during and after the bankruptcy of Chapter 13?

Home Buyers can qualify for FHA Loans one year into a Chapter 13 Bankruptcy Repayment Plan with Trustee Approval:

  • There is no waiting period to qualify for FHA Loans after Chapter 13 Bankruptcy discharged date
  • Another great news with someone who has just filed bankruptcy is that their credit scores will not remain low forever
  • Credit scores will naturally improve as months pass by
  • It is like recovering from a hangover
  • As time passes, credit scores will improve even if consumers do not do anything
  • Re-Establishing credit right after Bankruptcy by getting a few secured credit cards will expedite boosting credit scores
  • Lenders will not have any problems giving a borrower a loan approval after the borrower meets the bankruptcy waiting period requirement
  • Most lenders will not approve anyone who had late payments after bankruptcy

A bankruptcy will be on a person’s credit report for 10 years.

Qualifying For Mortgage After Foreclosure

A foreclosure will have a devastating effect on credit score just like bankruptcy.

  • Borrowers can qualify to purchase a home with an FHA Loan after meeting the 3-year waiting period after foreclosure
  • There is a seven-year waiting period after the recorded date of foreclosure to qualify for Conventional Loans
  • There is a four-year waiting period to qualify for conventional loans after the recorded date of deed in lieu of foreclosure and/or short sale
  • The waiting period start clock starts from the date of the sheriff sale or the date when their names were transferred out of the deed of the house to the lender’s name
  • As with bankruptcy, the drop in credit scores is temporary and a person who has had a foreclosure can get high credit scores as time passes and as they re-establish their credit

A foreclosure will be on a person’s credit report for a period of 7 years.

Qualifying For FHA Loans With Judgments

A judgment has a devastating effect on a person’s credit score plus many lenders will not approve a person for a mortgage loan if they have unresolved unsatisfied judgments on their record.

  • Statute of Limitations on judgments depends on the state
  • In most states,  judgments are active for at 10 years
  • Again, depending on the state the judgment was issued, the statute of limitations may be different
  • In most states, judgment creditors can renew the judgment for another 10 years once the first 10 years statute of limitations is up
  • To get rid of a civil judgment, the person either has to file bankruptcy, pay the judgment off, enter into a payment plan with the judgment creditor, or get the judgment vacated
  • Judgments can be settled with the judgment creditor
  • Borrowers can qualify for FHA Loans with judgments
  • Borrowers can pay the judgment off prior to or at closing

Borrowers can also enter into a written payment agreement with the judgment creditor:

  • Need to provide three months canceled checks and/or bank statements to the lender to qualify for FHA Loans with judgments

FHA Guidelines On Bad Credit On Collections And Charge Offs

What are the FHA guidelines regarding uncollectible funds for debt collection and write-offs

Borrowers with unpaid collections that are aged, do not pay them if applying for FHA Loans.

  • Paying old collections accounts will have negative credit impact on credit scores
  • FHA Borrowers can qualify for FHA Loans with outstanding collection and charge off accounts
  • Collection accounts that are over 2 years old will have little or no impact on credit scores

Late Payments In Past 12 Months

Borrowers can have bad credit and qualify for home loans. But lenders want to see timely payments in past 12 months. Late payments will definitely drop credit scores by at least 40 or more points.

  • Consumers who paid a monthly installment and/or revolving debt 30 days or more late, contact the creditor:
    • See if they can give a one-time forbearance
    • See if they will remove the late payment from credit report
  • If they don’t, credit scores will naturally improve as tradelines ages
  • Most lenders have overlays where late payments after bankruptcy, foreclosure, deed in lieu of foreclosure, a short sale is not allowed

Most lenders require timely payments in the past 12 months.

FHA Guidelines On Bad Credit And Credit Inquiries

Hard pull credit inquiries will drop credit scores.

  • Each hard credit pull will drop credit scores by at least 2 points
  • Try not to apply for credit all at once 
  • One or two credit inquiries in a six month period are alright

There are lenders like myself who specialize in bad credit home loan programs.  Borrowers who have had prior bad credit and are looking for a bad credit home loan please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com.  You can also subscribe to our mortgage and real estate newsletter at www.gustancho.com .

Related> Mortgage Loans With Under 580 FICO Credit Scores

Related> Bad Credit Mortgage Loans: FHA Loans to the Rescue

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