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FHA Loan With Collection Accounts Mortgage Guidelines

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FHA Loan With Collection Accounts Mortgage Guidelines

This BLOG On FHA Loan With Collection Accounts Mortgage Guidelines Was UPDATED On February 9th, 2019

Can I Qualify For FHA Loan With Collection Accounts?

Home Buyers can qualify for FHA Loan With Collection Accounts without having to pay off their outstanding collection account balance under FHA Mortgage Lending Guidelines

  • However, just because borrowers can qualify for FHA Loan With Collection Accounts under FHA Guidelines With Collection Accounts does not mean that every lender will allow it
  • Banks and lenders often have additional mortgage lending guidelines that is in addition to the minimum FHA Guidelines
  • This additional FHA requirement by lenders is called mortgage lender overlays
  • Banks and lenders do have to meet the minimum FHA lending guidelines
  • However, they are allowed to be more strict and impose higher lending standards that are in addition to FHA Guidelines
  • Even though FHA does not require borrowers to pay outstanding collections and charged off accounts, lenders can have overlays and require outstanding collection/charged off accounts be paid off

Qualifying For FHA Loan With Collection Accounts And Debt To Income Calculations

FHA classifies collection accounts into three categories:

  1. Medical Collection Accounts
  2. Non-Medical Collection Accounts
  3. Charge Off Accounts

Non-Medical Collections Guidelines

FHA requires that any outstanding non-medical collection accounts with an aggregate total unpaid collection account balance of greater than $2,000, that 5% of the unpaid outstanding collection balance be used in the calculation of the borrower’s debt to income ratio.

  • For example, if borrower has a total outstanding collection balance of $10,000 from creditors who are non-medical collection accounts, then FHA will require that 5% of the outstanding unpaid collection balance, or $500 ( 5% of the $10,000 unpaid collection account balance ) be used in calculating borrower’s debt to income ratio
  • The $500 will be considered as a monthly debt payment
  • This holds true even though the borrower does not have to pay for it
  • Borrowers with large unsatisfied outstanding non-medical collection accounts can be affected from this FHA Guidelines On Outstanding Non-Medical Collection Accounts

Medical Collections Mortgage Guidelines

With medical collection accounts, outstanding unpaid balances on medical collection accounts do not count and are excluded from debt to income ratio calculations. This is always the case no matter how high the outstanding unpaid the medical collection account balance is.

FHA Guidelines On Charge Off accounts excludes any charge off accounts from debt to income calculations and charge off accounts are exempt for FHA Loans.

FHA Loan With Collection Accounts And Credit Disputes

FHA has strict lending guidelines on credit disputes with collection accounts.

  • FHA requires that all credit disputes on non-medical outstanding collection accounts need to be retracted prior to the mortgage process
  • This applies if the total unpaid outstanding non-medical collection account balances are greater than $1,000
  • The issue with retracting credit disputes is that once the credit disputes are retracted, that will drop borrower’s credit scores
  • FHA allows for borrowers with charge off accounts to qualify for FHA Loans no matter how much the charge off account balance is
  • However, you cannot have credit disputes on charge off accounts
  • Charge off account credit disputes needs to be distracted in order for the mortgage process to proceed or the the mortgage approval process will be held in suspense

Non-medical collection credit disputes that are 24 months or older are exempt from retractions.

Credit Disputes Mortgage Guidelines

FHA allows credit disputes on medical collection accounts with balances and non-medical collection accounts with zero balances. FHA will also allow non-medical collection accounts with total unpaid outstanding collection balances of up to $1,000. Any credit disputes on non-medical collection accounts with unpaid outstanding balances of greater than $1,000 needs to get retracted and/or need to get downgraded to a manual underwrite . Any credit disputes that are two years or older are exempt from retraction. This is for non-medical and medical collection accounts.

Why Do Lenders Require Collection Accounts Be Paid Off

Most banks and many mortgage lenders will require that collection accounts be paid off in order to qualify with their bank and/or lending institution even though Guidelines On FHA Loan With Collection Accounts does not require that.

  • The reason why most banks and lenders require outstanding unpaid collection accounts to be paid off is because they have FHA lender overlays on collection accounts
  • Lender overlays are requirements that are above and beyond the minimum FHA Guidelines that any bank and/or FHA approved mortgage lender can require

Borrowers denied or do not qualify for a FHA Loan by a bank or other lender due to their lender overlays on collection accounts, contact us at The Gustan Cho Team at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are a no lender overlay FHA approved mortgage lender and just go off the FHA minimum required lending guidelines. Gustan Cho Associates at Loan Cabin Inc. has zero lender overlays on FHA, VA, USDA, and Conventional Loans.

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