FHA Guidelines On Charge Offs And Collection Accounts

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This Article On FHA Guidelines On Charge Offs Was Written By Gustan Cho NMLS 873293 And UPDATED On January 10th, 2019

Charge Off Accounts are creditors who deemed the consumer’s credit account as not collectible and charged it off on their books.

  • Most credit card companies will charge off a consumer who does not pay on their revolving credit card account after six months
  • Just because a credit account is charged off does not mean that it relieves the consumers of the debt
  • Charged off accounts can be sold to third party collection agencies

Borrowers can qualify for FHA Loans with an outstanding charge off accounts without having to settle the charge offs or pay off the charge off accounts according to FHA Guidelines On Charge Offs.

  • FHA Guidelines On Charge Offs state that an FHA Borrower does not have to pay off outstanding charge off accounts nor collection accounts to qualify for an FHA Loan
  • However, many lenders have lender overlays on charge offs and collection accounts

In this article, we will cover and discuss FHA Guidelines On Charge Offs And Collection Accounts.

FHA Lender Overlays

What Are Lender Overlays?

  • Lender Overlays are mortgage lending guidelines that are instituted by the individual mortgage lender and NOT FHA, VA, USDA, FANNIE MAE, nor FREDDIE MAC Guidelines
  • Each mortgage loan program has its own minimum mortgage lending guidelines:
    • FHA GUIDELINES
    • VA GUIDELINES
    • USDA GUIDELINES
    • FANNIE MAE GUIDELINES
    • FREDDIE MAC GUIDELINES
  • Lenders DO need to meet the minimum mortgage lending guidelines
  • However, each mortgage lender can have higher mortgage lending standards that surpass the minimum guidelines which are overlays
  • These additional higher lending standards are called Mortgage Lender Overlays or Investor Overlays
  • FHA Guidelines On Charge Offs state that charge offs do not have to be paid and does not count

Borrowers with charge offs can qualify for FHA Loans.

Typical Common Lender Overlays On Collections And Charged-Off Accounts

Typical overlays required by mortgage lenders are the following:

  • Charge offs cannot exceed $2,000
  • Charge offs needs to be paid
  • 5% of the charge off balance needs to be calculated on debt to income ratios

Charge offs need a written payment agreement and three months payment seasoning needs to be made by borrowers.

FHA Guidelines On Charge Offs And Collection Accounts

However, with charged-off accounts, there are requirements by HUD, the parent of FHA, that needs to be paid.

  • Charge Off accounts with balances does not matter when calculating debt to income ratios like collection accounts
  • 5% of the non-medical collection account balances need to be taken into calculations of debt to income ratios
  • Not with charged-off accounts

Borrowers who are told they do not qualify for an FHA loan due to having charge off accounts on credit report, contact us at Gustan Cho Associates at 262-716-8151 or text for faster response. Or email us at gcho@gustancho.com. Borrowers can also email us at gcho@gustancho.com 7 days a week, evenings, weekends, holidays. Gustan Cho Associates Mortgage Group is available to take calls or email mortgage inquiries. We represent a five star national mortgage lender with no overlays on FHA Loans, VA Loans, USDA Loans, and Conventional Loans

FHA Guidelines On Charge Offs And What Are Charge Offs?

What Are Charge Offs? 

Charge Offs is when a creditor has tried to collect on a debt owed by a consumer and has written off the debt.

  • A charge off account does not mean that it relieves the consumer of the debt
  • The consumer is still liable for the debt and the creditor can always go after the consumer for the amount of the charge off account

Here are ways of getting rid of charge offs:

  • Pay off the charge off account
  • Consumers can settle the charge off for less than full face value
  • They can get a paid off settlement letter from the creditor and make sure that the credit bureaus report it as settled
  • Let the statute of limitations expire
  • The statute of limitations on collections and charge offs depends on each individual states
  • Filing Chapter 7 Bankruptcy will discharge the charge offs and you will be no longer liable for the charge off accounts

The older the charge off account it is, the less likelihood that the creditor will come after consumers for the charge off account.

  • Charge off accounts can be sold for pennies on the dollar to third party collection agencies
  • So until you pass the statute of limitations on collections and charge offs, the charge off accounts can still haunt consumers
  • Remember that FHA Guidelines On Charge Offs state that borrowers do not have to pay off charge off accounts to qualify for an FHA Loan
  • But the lender may have overlays on charge off accounts and may not qualify you due to charge offs

If that is the case, contact us at Gustan Cho Associates. We have no overlays on charge off accounts nor any lender overlays on any of the following loan programs:

  • FHA Loans
  • VA Loans
  • USDA Loans
  • Fannie Mae and/or Freddie Mac Conventional Loan Programs

How Are Charge Offs Reported On Credit Reports

I get many calls from borrowers who were told by their loan officers that they were aware that FHA Guidelines On Charge Offs do not count but the borrower does not qualify because their charge offs have a balance. The loan officer does not know how to read credit reports.

  • ALL CHARGE OFFS ON CREDIT REPORTS HAVE OUTSTANDING BALANCES REPORTED.
  • The borrowers who came to me for consultation were told that if the charge offs had zero balances on them that they would qualify
  • There are no zero balance charge offs reported on credit reports

You will have an outstanding balance reported on all consumer credit reports.

FHA Lender With No Overlays On FHA Loans

Home Buyers with less than perfect credit and who are told that they do not qualify for an FHA Loan by another loan officer due to having charge offs on credit report with outstanding balances, please contact us at 262-716-8151 or text us for faster response. You can also email us at gcho@gustancho.com 7 days a week, evenings, weekends, holidays. Gustan Cho Associates is available to take your calls or email mortgage inquiries. We represent a five-star national mortgage lender with no overlays on FHA, VA, USDA, and Conventional Loans.

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