This BLOG On FHA Guidelines On Collection Accounts And Charge Offs Was UPDATED On May 4th, 2019
If consumers default on a credit card, auto loan, student loan, installment loan, or any other loan obligation and do not meet those payment obligations, those accounts will go into default and collection activities will start.
- Most folks have the good intention in paying all of their monthly debt obligations
- They have no intention of defaulting
- However, there are circumstances where a consumer may lose their job or lose their business
- The outcome is where their income stream comes to an abrupt halt
- Many can no longer meet their monthly debt obligations
- When this occurs, the creditor will try to collect on the debt internally for 90 days
- If a consumer does not make payment arrangements, then the creditor will most likely charge it off
- Creditors normally sell bad debt to a third party collection agency
- The third party collection agency will then purchase the debt for pennies on the dollar
- Or the third party collection agency may contract with the creditor where they get a percentage on what they collect
- Either case, collection activities will be aggressively pursued the first six to 12 months of a fresh collection debt
- Tactics that collection agencies use are the following:
- calling consumers
- mailing consumers with threatening like collection letters
- letters may have a law firm name on it and state if they do not contact the collection agency within the next few days, a lawsuit will be filed and wage garnishment proceedings can be initiated
- Many times, consumers get frightened with such collection tactics
- Often times borrow money from friends and family members and pay the collection agencies on their collection accounts
- Unfortunately, most consumers cannot continue to make the payments because they cannot find full time employment
- They eventually give up paying the creditor
- With FHA Guidelines On Collection Accounts, collection and charged off accounts to not have to be paid to qualify for mortgage
FHA Guidelines On Collection Accounts And Process Of Collection Accounts
As stated earlier, most collection agencies aggressively pursue in trying to collect a delinquent collection account when they first get it.
- After the collection accounts ages, it is harder and harder to collect on collection accounts
- Most consumers stopped getting harassed after a year or two
- As the collection and charge off accounts age, most collection agencies give up in trying to collect
- Collection and charge off accounts get bought and sold all the time from collection agencies
- As collection accounts, age, the less of a likelihood the collection agency will pursue the legal activity to get a judgment
Why Are Lenders Concerned On Collection Accounts?
The biggest fear with collection accounts is that every collection account can turn into a judgment.
- A judgment is the worst credit derogatory item consumers can have
- A judgment is a court’s decision that a debtor owes a judgment creditor money
- Courts give authorization to the judgment creditor to proceed with legal proceedings such as the following:
- attaching liens on assets
- garnishing bank accounts and wages
- to enforce the judgment creditors need to follow the legal process
- Most collection agencies will not pursue legal proceedings to get a judgment on a debt unless they know or feel that the judgment debtor has assets or high income because legal proceedings can be quite costly.
- A judgment creditor that has a judgment on a consumer who is unemployed or has no assets cannot collect on the judgment
- This because people like these are considered being judgment proof
- Being judgment proof means that the judgment debtor has no means in paying back the judgment issued by the courts
Can I Qualify For Mortgage With Unpaid Collection Accounts?
FHA Guidelines On Collection Accounts allow for a home buyer or homeowner who needs a refinance mortgage to be eligible for an FHA loan with unpaid collection accounts.
- FHA has two categories for collection accounts per FHA Guidelines On Collection Accounts:
- The first category is medical collections
- All medical collection accounts with unpaid balances are exempt and does not count
- The second collection category that FHA has is non-medical collection accounts
- Unpaid non- medical collection accounts are the following:
- such as credit card accounts
- installment debt
- or other unpaid collection accounts
- Unpaid non- medical collection accounts are the following:
- However, per FHA Guidelines On Collection Accounts if the unpaid non-medical collection accounts have balances of $2,000 or greater, then 5% of the unpaid balance will be used
- This figure will be counted towards debt to income calculations as a hypothetical debt
- Borrowers with a bunch of smaller unpaid collection accounts and the aggregate balance of the total of all of the aggregate unpaid balance yield an unpaid balance of $2,000 or more, the following will apply:
- 5% of the unpaid aggregate balance will be used towards calculating debt to income ratios
- Charge offs and zero balance non-medical collection accounts do not count per FHA Guidelines On Collection Accounts
What If Unpaid Collection Account Has Large Balance?
There are cases where unpaid collection accounts can have extremely high unpaid balances such as $10,000 or more.
- This is such the case on auto repossessions or higher ticket credit items
- Let’s take a case scenario:
- collection account with an unpaid balance of $20,000
- 5% of the unpaid balance is $1,000 per month
- that $1,000 per month will be used towards debt to income calculations
- The good news that FHA allows you to make a written payment agreement with the collection agency
- Whatever minimum monthly payment agreement is, that payment will be used towards debt to income calculations
- On the above example
- if a consumer were to make a written payment agreement with the collection agency of the $20,000 unpaid collection balance
- got a written executed payment agreement making $100 per month
- that $100 per month will be used to calculate the debt to income ratio
- this figure is used instead of the $1,000 monthly payment
- 5% of the $20,000 unpaid collection balance is no longer used to calculate the debt to income ratio
- The good news is that this is effective immediately and no monthly payment seasoning is required