This BLOG On FHA Guidelines On Medical Collections And Charged Off Accounts Was UPDATED On May 14th, 2019
Updated FHA Guidelines On Medical Collections And Charged Off Accounts:
FHA categorizes collection accounts into two categories:
- Medical collection accounts
- Non-medical collection accounts
Medical collection accounts are treated totally differently than non-medical collection accounts.
- FHA understands that home loan applicants with medical collection accounts do not have the medical collection accounts due to disregard for credit
- FHA understands that people who have medical collection accounts that are not paid could have a discrepancy with their medical insurance provider
- This often happens where the medical insurance provider has not fully paid the medical bills
How Outstanding Non-Medical Collections Differ From Medical Collection Accounts?
Under FHA mortgage guidelines on outstanding collections, borrowers do not have to pay unpaid collection accounts.
- Whether it is a medical collection account or non-medical collection accounts, HUD, the parent of FHA, does not require it
- However, with non-medical collection accounts, a percentage of outstanding collection balance is taken into consideration
- If unpaid non-medical collection accounts total more than $2,000 dollars here is how it works:
- FHA requires that 5% of the unpaid outstanding collection account balance be taken into consideration when the underwriter is calculating borrowers debt to income ratios
- This can create a problem if the mortgage loan applicant has a large unpaid collection account balance
- For example, here is a case scenario:
- if the total unpaid collection balance is $10,000
- then 5% of the unpaid $10,000 collection account balance or $500 per month will be taken into consideration
- this amount will be counted as a monthly debt obligation by the mortgage underwriter in calculating the borrower’s debt to income ratios
- this is a hypothetical debt borrower does not need to actually pay
- The good news is if borrowers have a substantially high unpaid collection balance, FHA will allow borrowers to set up a written payment agreement with the collection account agency
- That monthly payment agreement will be the amount that will be used as the monthly debt obligation in lieu of the 5% of outstanding collections balance
- So on the case where borrowers owe the collection agency $10,000 case scenario:
- instead of counting the $500 as the monthly debt obligation
- if a borrower has a written payment agreement for $100
- then the $100 will be used as the monthly debt in calculating the debt to income ratios
FHA Guidelines On Medical Collections
With FHA Guidelines On medical collections with an unpaid balance, the rules are totally different.
- FHA Guidelines On Medical Collections are exempt from the above rules and regulations
- No matter what the unpaid collection balance is on medical collections, it is not used to calculate debt to income ratios when it comes to income calculations
- Unpaid medical collections can be ignored with FHA lenders unless the FHA mortgage lender has their own lender overlays where they override the minimum FHA lending guidelines
FHA Guidelines On Charge Offs
FHA ignores charge off collection accounts and considers it as zero balance.
- However, you cannot have any credit disputes when it comes to charge off accounts
- All credit disputes on non-medical collection accounts that are charge offs need to be retracted for the mortgage approval process to continue
- If you are in the mortgage loan application and mortgage process and there are credit disputes on charge off accounts on non-medical collection accounts, the mortgage process will come to an immediate halt until the credit disputes are removed
- Non-medical charge off accounts is exempt from this rule. FHA Guidelines on medical collections are exempt all the way around.
FHA Guidelines On Credit Disputes
There are strict FHA guidelines on credit disputes.
- If a borrower has credit disputes on unpaid collections and that the sum of the unpaid balances total $1,000 or greater on non-medical collection accounts, all credit disputes must be retracted in order for the mortgage process to go forward
- For unpaid medical collection accounts, the FHA guidelines on credit disputes are exempt
- Borrowers can have medical collection accounts credit balances no matter how much the unpaid medical collection balance is
- Again, FHA Guidelines on medical collections are exempt
Borrowers cannot have credit disputes on the following:
- Late Payments
- Charged Off Accounts
- Public Records
- Any other derogatory credit tradelines with the exemption of medical collections and non-medical collections with zero balances