This BLOG On FHA Guidelines On Charge Offs And Collections Accounts Was UPDATED And PUBLISHED On October 19th, 2019
FHA Guidelines allows borrowers with charge offs, collections, and disputes to qualify for FHA loans.
- FHA Guidelines On Charge Offs And Collections does not require borrowers to pay outstanding collections and charge off accounts to qualify for FHA Loans
In this article, we will discuss FHA Guidelines On Charge Offs And Collections.
HUD Agency Guidelines Versus Lender Overlays
There are two sets of mortgage lending guidelines:
There are two types of FHA Guidelines On Charge Offs And Collections:
- The first set of guidelines are directly from FHA, the Federal Housing Administration
- The second set of FHA Guidelines On Charge Offs And Collections are individual lender overlays
Mortgage lender overlays are mortgage lending guidelines that a particular lender will impose in addition to those set by the Federal Housing Administration, FHA.
Case Scenario On Lender Overlays
For example, FHA may allow a mortgage loan applicant with unpaid collection accounts to qualify for an FHA Loan without having to pay it off under FHA Guidelines On Charge Offs And Collections:
- However, a particular lender may require all collection accounts to be paid off even though FHA does not require it
- This is called overlays
- Same with credit scores
- FHA requires a minimum credit score of 580 from any borrowers for them to qualify for a 3.5% down payment home purchase FHA insured mortgage
Many, if not most, set their own standards with regards to minimum credit scores.
Lender Overlays On Credit Scores
Most mortgage companies do have mortgage lender overlays on minimum credit scores:
- Most require 620 credit scores and a large percentage of mortgage lenders such as banks, credit unions, require 640 credit scores or higher
- FHA only requires a 580 credit score to qualify for 3.5% down payment FHA Home Loan
- There are lenders, such as myself, that do not have any mortgage lender overlays
- Will just go off the minimum FHA mortgage guidelines.
- As long as borrowers meet the minimum FHA guidelines, no overlays.
To get a pre-approval now, please click on APPLY NOW FOR PRE-APPROVAL and get approved.
FHA Guidelines On Unpaid Collection Accounts
FHA Guidelines does not require for you to pay off existing unpaid collection accounts.
However, FHA Guidelines does classify collection accounts into three separate categories:
- Non-Medical Collection Accounts
- Medical Collection Accounts
- Charge Off Accounts
Non-Medical Collection Accounts
Any non-medical collection account with a total aggregate unpaid balance of $2,000 is ignored by FHA Guidelines unless the particular lender has own overlays on paying unpaid non-medical collection accounts.
- If the unpaid non-medical collection accounts are greater than $2,000, FHA requires lenders to take 5% of the unpaid collection balance and include it as a hypothetical debt in debt to income ratio calculations
If the 5% calculations is too much and will not qualify borrowers can make a written payment agreement with the collection agency. The amount agreed upon as the monthly payment will be used to calculate the debt to income ratios.
Medical Collection Accounts
Medical Collections are treated differently than non-medical collection accounts.
- The 5% rule is exempt
- No matter how much the medical collection account outstanding balance is, no portion of it is taken out and used for debt to income ratio calculations
- Credit Disputes are exempt from medical collections
- Borrowers can have credit disputes on medical collections
For medical collections, there are no restrictions on unpaid collection account balances and is often ignored unless the particular lender may have their own overlays.
Can I Qualify For FHA Loan With Charge Offs?
Old collection accounts who the creditor deems uncollectible are charged off on credit report.
- HUD Guidelines On Charged Off Collection Accounts does not require borrowers to pay off outstanding charged off accounts to qualify for FHA Loans
- If a borrower goes to a lender and that lender tells the borrower that they do not qualify for an FHA Loan due to charge off, it is so because of that lender overlays and NOT FHA Guidelines
- Borrowers cannot have credit dispute on charged off accounts
- The credit dispute needs to be removed
- The mortgage process will come into a complete halt if there are credit dispute
Once credit disputes are retracted, borrowers credit scores will drop.
What Are Charge Offs?
- A charge off is when a creditor writes the debt off as uncollectible
- Many consumers may have unpaid collection accounts that reports as charge offs on their credit reports
- Charge offs do not count
- FHA does not require any charge offs to be paid off since it has been written off
Also, those with charge offs will find it next to impossible to pay the charge offs because nobody can technically take their payments since it has been written off their books.
Qualifying For FHA Loans With Collections And Charge Offs
Home Buyers with Outstanding Collections and Charge Offs needing to qualify for FHA Loans with a lender with no FHA Lender Overlays, please contact us at Gustan Cho Associates Mortgage Group at 262-716-8151 or text us for faster response or email us at firstname.lastname@example.org. We are available 7 days a week, evenings, weekends, and holidays. We can help borrowers with prior credit issues in most of the 50 states