FHA Loan Collection Accounts With Outstanding Balances
This Article Is About FHA Loan Collection Accounts With Outstanding Balances
Many Borrowers often are confused when shopping for FHA Loans.
One lender tells them that they need to pay outstanding collections off while another lender may tell them that the maximum outstanding collections they can have are no greater than $5,000. Yet other lenders may tell them that borrowers do not qualify for FHA Loans until the collections have been paid and been seasoned for two years. So what is the correct answer? Why is it so many different Lenders who have different mortgage guidelines when it comes to FHA Mortgage Requirements? Who is right and who is wrong? Aren’t all FHA Lenders the same? Isn’t FHA Loans government loans and have national uniform lending guidelines?
The answer to the above is not all lenders have the same FHA mortgage requirements. Most Lenders have mortgage overlays on FHA Loans. The Gustan Cho Team has no mortgage overlays on FHA Loans.
Lender Overlays On FHA Loan Collection Accounts
FHA Loan Collection Accounts With Outstanding Balances. Under HUD Guidelines On Collections and Charged Off Accounts, borrowers are not required to pay outstanding collections and charged-off accounts to qualify for FHA Loans.
Lender Overlays are mortgage guidelines that are above and beyond those of FHA Guidelines imposed by each individual lender.
Why Lenders Have Different FHA Requirements
Just because one lender says no does not mean that borrowers cannot qualify with another lender. Under FHA Loan Collection Accounts Guidelines, outstanding collection accounts do not have to be paid for borrowers to qualify for FHA loans. However, many lenders do require collection accounts to be paid prior to closing or at closing as part of their own mortgage overlays. For lenders with no overlays on collection accounts, borrowers do not have to pay off old collection accounts with outstanding balances. FHA recently changed rules in collection accounts.
New Mortgage Guidelines For Collection Accounts
For borrowers with outstanding non-medical collection accounts, 5% of the unpaid balance is used towards calculating debt to income ratios under HUD 4000.1 FHA Handbook:
- Even though borrowers are not required to pay outstanding collections mortgage underwriters will automatically take 5% of the unpaid balance on non-medical collection balance and add it as a monthly payment and use it towards debt to income ratios calculations
- For example, for borrowers with unpaid non-medical collection account with outstanding non-medical collection balance of $10,000, the underwriter will use 5% of the $10,000 outstanding balance owed, $500.00, and use that figure as a hypothetical month debt in calculating debt to income ratios
- This rule only applies if the total aggregate amount of collection account balance exceeds $2,000 in outstanding non-medical collections
- For those who have unpaid non-medical collection accounts under $2,000, they are exempt from this 5% DTI calculation rule
Unpaid Medical Collection Accounts
FHA Loan Collection Accounts on non-medical is exempt. For collection accounts that are medical collections, the above rules do not apply. Borrowers can have outstanding collection accounts on medical collections. There are no limits as to the amount of balance the borrower has and the 5% of the outstanding balance will not be deducted. If borrowers consult with lenders with overlays, that particular lender may have their own overlays on how they treat collections, whether medical or non-medical.
Credit Disputes During Mortgage Process
Credit disputes for any non-medical collection accounts with outstanding credit balances exceeding $1,000 or more are not allowed. All credit disputes need to be retracted before the mortgage process can proceed. For those going through credit repair and disputing derogatory credit items with credit balances, credit disputes on non-medical collections, charged-off accounts, late payments, and other derogatory tradelines needs to be removed. Mortgage Guidelines prohibit credit dispute on items over $1,000 that is non-medical.
Credit Disputes need to be retracted before the loan process can proceed forward. The problem with retracting a credit dispute is the credit score often drops once it is retracted. I had a case where one mortgage applicant retracts a credit dispute with a credit balance and once the credit dispute was retracted, it dropped her scores by almost 100 points. Non-Medical credit disputes with zero balances are exempt. Borrowers can dispute derogatory credit items with zero balances and will not affect the mortgage process. Medical derogatory credit disputes with credit balances are also exempt from this rule.
Lender With No Mortgage Overlays On FHA Loan Collection Accounts
Borrowers who need to qualify for a mortgage with a national direct lender with no mortgage lender overlays on government and conventional loans can contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at [email protected] We have zero overlays on FHA, VA, USDA, and Conventional Loans. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays.