This BLOG On FHA Loan With Large Collection Accounts Mortgage Guidelines Was UPDATED And PUBLISHED On June 10th, 2020
How To Qualify For FHA Loan With Large Collection Accounts:
Home Buyers can qualify for FHA Loan With Collection Accounts.
- FHA does not require borrowers to pay off outstanding collection accounts in order to qualify for FHA Loan
- However, FHA does have specific rules and regulations when it comes to qualifying for a mortgage With Large Collection Accounts
In this article, we will discuss and cover qualifying for an FHA mortgage With Large Collection Accounts Mortgage Guidelines.
Types Of Derogatory Credit
FHA has three different types of collection account categories:
Again, FHA does not require applicants to pay off outstanding collection accounts:
- With medical collection accounts, FHA exempts all medical collection accounts with outstanding balances from the calculation of debt to income ratios
- Qualifying for FHA Mortgage With Large Collection Accounts that is medical collection accounts, lenders can ignore it
- Charge off accounts also can be ignored
- FHA approved lenders can ignore charge off accounts
This holds true even if the charge off account balance was a large balance.
FHA Loan With Large Collection Accounts That Are Non-Medical Collection Accounts
Collection accounts that are non-medical collection accounts are treated differently.
- FHA does not require borrowers to pay off the non-medical collection account
- However, with non-medical collection accounts that total an outstanding collection balance of $2,000 or more, HUD requires lenders take 5% of the outstanding collection account balance and use that as part of borrower’s monthly debt to income ratio calculations
- This holds true even though borrowers do not have to make any payments
Many borrowers may have a hard time qualifying for FHA Loan With Large Collection Accounts if the collection account balance is substantially high on non-medical collection accounts.
Case Scenario Of FHA Loan With Large Collection Accounts
For example, here is a case scenario:
- if the borrower had a $10,000 outstanding collection account balance on a non-medical collection account
- the lender needs to use 5% of the $10,000 or $500 per month as part of borrower’s monthly expenses this holds true even though borrower does not need to make this payment
The reason the Federal Housing Administration requires this is in the event if the collection agency decides legal action against borrowers, the collection account can turn into a judgment where a lien can be placed on the borrower and placed on the property as well as assets of the borrower.
DTI Issues With FHA Loan With Large Collection Accounts
Consumers higher debt to income ratios, there may be issues if they need an FHA Loan With Large Collection Accounts that are non-medical collection accounts.
- With non-medical collection accounts with outstanding balances, lenders are required to take 5% of the unpaid outstanding collection balance and use it towards calculating the borrower’s debt to income ratios
- If the outstanding collection account balances are tens of thousands of dollars, this may disqualify borrowers due to higher debt to income ratios
- FHA DTI Requirements allow up to a maximum of 46.9% front end debt to income ratio and 56.9% back end debt to income ratio for borrowers with at least a 620 credit score back end to get an approve/eligible per automated underwriting system
- For those with under 620 credit score, the maximum debt to income ratios are capped at 43% to get an AUS approval
- There is a solution for borrowers seeking a mortgage With Large Collection Accounts
If the FHA mortgage loan borrower can have a written payment agreement with the creditor, the written payment agreement that was agreed upon can be used in lieu of the 5% of the unpaid outstanding collection account balance. For example, if the consumer has a written payment agreement with a creditor for $100 on an outstanding collection account balance of $10,000, the $100 per month of the written payment agreement will be used for debt to income calculation instead of the 5% of the $10,000 or $500. Having written payment agreements with creditors on large outstanding collection account balances can be one way of solving high debt to income ratios due to large outstanding non-medical collection account balances.