fbpx

FHA Lending Guidelines On Collection Accounts And Charge Offs

0

FHA Lending Guidelines On Collection Accounts And Charge Offs

This BLOG On FHA Lending Guidelines On Collection Accounts And Charge Offs Was UPDATED On April 7th, 2019

FHA Lending Guidelines On Collection Accounts With Outstanding Balances:

Collection accounts with outstanding balances and charged off accounts do not have to be paid to qualify for FHA Home Loans:

  • Those consumers who had a financial hardship and fell behind on their payments most likely have collection accounts with balances still owed on them
  • Many collection agencies have given up in trying to collect on collection accounts
  • The older the collection account is, the less of a likelihood it will be it will turn into a judgment
  • The good news is borrowers can still get qualified for FHA Loans with unsatisfied collection accounts
  • The bad news is that early in 2014, new mortgage lending guidelines have been implemented with regards to FHA Loans and collection accounts
  • Prior to the new 2014 rules and regulations on collection accounts, unsatisfied collection accounts with regards to debt to income calculations were ignored by mortgag underwriters 
  • However, new rules and regulations were implemented in regards to collection accounts in 2014

Classification Of FHA Lending Guidelines On Collection Accounts

Collection accounts are now classified into two categories:

  • Non-medical collections and medical collections
  • Medical collection accounts are normally ignored when it comes to mortgage lending underwriting guidelines and debt to income ratio calculations
  • Non-medical collections now do count towards the calculation of debt to income ratios
  • Prior to 2014, open balances on collection accounts could have been ignored and exempted from debt to income ratio calculations
  • Now, things are different
  • With non-medical collection accounts with open unsatisfied balances, the maximum amount FHA will allow will be $2,000
  • All collection accounts with aggregate unpaid unsatisfied collection account balances of $2,000 or greater, 5% of the unpaid unsatisfied balance will be counted towards the calculation of the borrower’s debt to income ratio calculations
  • For example, a borrower unpaid old non-medical collection account balances of $20,000, the 5% of the $20,000, which is $1,000 will be used towards the calculation of the borrower’s debt to income ratios
  • Borrower does not have to pay this and it is just a hypothetical debt underwriters needs to use 

Solution To Large Outstanding Balances On Collection Accounts

There is a solution with regards to high open credit balances on unpaid unsatisfied collection account balances.

  • FHA Lending Guidelines On Collection Accounts will allow a written payment agreement in lieu of the 5% of the collection account balance
  • The good news is the day the written payment agreement is in effect, the underwriter will go with that date and no seasoning requirement is required
  • For example, let’s take a case scenario
    • a borrower with an outstanding balance of $20,000 with a collection agency
    • has set up a payment agreement for them to pay $200.00 per month
    • the $200.00 per month will be used towards the calculation of the borrower’s debt to income ratios instead of the 5% of the $20,000, or $1,000.00
  • As mentioned earlier, medical collection accounts are exempt from this rule

FHA Lending Guidelines On Collection Accounts And Disputes

There are new rules and guidelines when it comes to FHA Lending Guidelines On Collection Accounts And  Credit Disputes of derogatory items.

  • Again, credit disputes are now classified into two categories: 
  • Medical disputes and non-medical disputes
  • There are no rules when it comes to medical disputes and borrowers can have active medical disputes during mortgage process
  • A consumer can dispute any medical derogatory collection accounts with the three major credit reporting agencies
  • Outstanding credit collection account balances on medical collections will not affect their mortgage loan application process
  • However, there are strict new rules and guidelines in 2014 for non-medical credit disputes
  • Borrowers cannot have an active dispute against a derogatory credit item with any of the three major credit bureaus which the balance amount is greater than $1,000.00 during the mortgage process
  • Zero balance derogatory tradelines and charge offs are exempt from this rule
  • In the event if there is a pending credit dispute that is non-medical and greater than a $1,000.00 unpaid unsatisfied credit balance, then the dispute needs to be retracted
  • One problem with a retraction is that once a dispute is retracted from the credit reporting agencies, the chances are that the consumer’s credit scores will drop

Borrowers who need to qualify for FHA Loan with a direct lender with no mortgage overlays on government and conventional loans, please contact us at The Gustan Cho Team at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com.

Gustan Cho NMLS ID 873293

www.gustancho.com

Leave A Reply

Your email address will not be published.

CALL NOW