This BLOG On FHA Guidelines On Outstanding Collection Accounts And Charge Offs Was UPDATED And PUBLISHED On May 28th, 2020
The Federal Housing Administration allows unpaid collection accounts and charged-off accounts in qualifying for a FHA insured mortgage loan. Home Buyers do not have to pay outstanding collections and/or charged-off accounts to qualify for FHA Loans.
- However, many lenders may require that collection accounts be paid prior to a mortgage loan approval
- Having collection account to be paid off is not a FHA guidelines on outstanding collection accounts
- Homebuyers 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 applicant with unpaid and unsatisfied collection account
- Borrowers with unsatisfied collection accounts told they do not qualify for FHA Loans by lenders is because that lender have overlays
In this article, we will discuss and cover FHA Guidelines On Outstanding Collection Accounts And Charge Offs.
Agency Guidelines Versus Lender Overlays
Lenders can have higher lending requirements that is above and beyond those of HUD, the parent of FHA:
- Borrowers might not be qualified with that particular mortgage lender but can qualify with a lender like myself where we do not have any mortgage overlays
- As long as borrowers meet the bare minimum FHA and/or Fannie Mae mortgage guidelines and get a Fannie Mae and/or Freddie Mac automated approval their loan will get approved and closed with a lender with no mortgage overlays
GCA Mortgage Group has no overlays on FHA, VA, USDA, and Conventional Loans Loans.
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 2018, The Federal Housing Administration has implemented tougher new rules and regulations
FHA classifies collections in two categories:
- Medical Collections
- Non-Medical Collections
There are stipulations on non-medical collections with regards to unpaid collection account balance per FHA Guidelines On Outstanding Collection Accounts:
- FHA Guidelines On Outstanding Collection Accounts now requires that any unpaid non-medical collection balance on collection accounts need to be counted towards debt to income ratios
- 5% of the balance on any unpaid non-medical collection account balance will be used as a monthly expense
- This will used towards the calculation of debt to income ratio calculations
- This rule applies only to non-medical collection accounts
- The total aggregate unpaid collection balance needs to exceed $1,000 or more
- If borrowers has only a $500 unpaid collection account, this 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.
FHA Guidelines On Outstanding Collection Accounts On Medical Versus Non-Medical Collections
Unpaid medical collections are exempt from this new FHA guideline concerning unsatisfied collection accounts
- Per FHA mortgage lending guidelines, medical collections can have high balances
- 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
Some Lenders will require all collections and charged-off accounts to be paid off.
Why Are 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 borrowers 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 or settling the judgment
- There are other ways of clearing an unsatisfied judgment
- One way is 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
- Borrowers can qualify for FHA Loans with outstanding judgments
- Need written payment agreement and three months of payments
- Borrowers cannot prepay the three months of judgment payments upfront
- Need to wait for three months seasoning
- Or borrowers can pay judgment at closing
- Proof of funds on how they are paying the judgment is required
Home Buyers who need to qualify for mortgage with a direct lender with no overlays can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at email@example.com. We have zero overlays on FHA, VA, USDA, and Conventional Loans.