FHA Guidelines On Outstanding Collection Accounts

The Federal Housing Administration allows unpaid collection accounts in qualifying for a FHA insured mortgage loan.  However, many mortgage lenders may require that collection accounts be paid prior to a residential mortgage loan approval.  Having collection account to be paid off is not a FHA guidelines on outstanding collection accounts. Home buyers can qualify with collection accounts with a FHA Loan under FHA Guidelines On Outstanding Collection Accounts. It is up to the individual mortgage lender to decide whether they will accept a mortgage loan applicant with unpaid and unsatisfied collection account.  If you have unsatisfied collection accounts and the mortgage lender that you went to tells you that you are not qualified for a FHA insured mortgage loan, do not get discouraged.  You might not be qualified with that particular mortgage lender but you will be qualified with a mortgage broker like myself where I represent dozens of wholesale mortgage lenders with no mortgage lender overlays.  As long as you meet the bare minimum FHA and/or Fannie Mae mortgage lending guidelines and get a Fannie Mae and/or Freddie Mac automated approval, you will get a residential mortgage loan.

FHA Guidelines On Outstanding Collection Accounts And Charge Offs

Before, FHA Guidelines On Outstanding Collection Accounts allowed unpaid collection accounts and there were no restrictions on the amount of the unpaid collection balance.  However, in 2014, The Federal Housing Administration has implemented tougher new rules and regulations concerning unpaid collection accounts per FHA Guidelines On Outstanding Collection Accounts on all FHA loans.  FHA Guidelines On Outstanding Collection Accounts now requires that any unpaid balance on collection accounts need to be counted towards the mortgage applicant’s debt to income ratios.  5% of the balance on any unpaid collection account will be used as a monthly expense and be used towards the calculation of the mortgage applicant’s debt to income ratio.  This rule applies only to non-medical collection accounts and the total aggregate unpaid collection balance needs to exceed $1,000 or more.  If the mortgage loan applicant has only a $500 unpaid collection account, this 2014 FHA guideline on unsatisfied collection accounts will not apply since the aggregate unpaid collection account is less than $1,000.  Those with thousands of dollars in unpaid collection accounts can be affected due to the 5% of the unpaid collection balance being counted towards the debt to income ratios.

Unpaid medical collections are exempt from this new 2014 FHA guidelines concerning unsatisfied collection accounts.  Per FHA mortgage lending guidelines, medical collections can have high balances and no portion of the unsatisfied balanced will be used per FHA guidelines on unpaid collection accounts.  However, many mortgage lenders do have overlays with medical collection accounts that have credit balances.

Why Are Mortgage Lenders Concerned With Older Unpaid Collection Accounts

Mortgage lenders are extremely concerned with unpaid collection accounts because unpaid collection accounts can turn into judgments.  Judgments are one of the worst derogatory items you can have on a person’s credit report.  A judgment is normally good for 10 years but the judgment creditor can renew the judgment for another 10 years.  Those with multiple judgments are forced into bankruptcy.  The only thing to clear a judgment is a bankruptcy.  There are other ways of clearing an unsatisfied judgment such as trying to vacate the judgment in court due to improper service of the summons.  Another way of clearing a judgment is to negotiate the judgment amount with the judgment credit for less than face value of the judgment.

Gustan Cho


The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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