This BLOG On FHA Loan With Medical Collections And Charge Offs Guidelines Was UPDATED And PUBLISHED On June 20th, 2020
There are two different types of mortgage guidelines:
- Agency Guidelines
- Lender Overlays
All lenders need to meet agency mortgage guidelines by HUD. However, most lenders will have additional mortgage requirements that are above and beyond those of HUD Guidelines called overlays. HUD does not require borrowers to pay outstanding collections and/or charged-off accounts. However, many lenders may require borrowers to satisfy collections and charged-off accounts.
In this article, we will discuss and cover FHA Loan With Medical Collections And Charge Offs Guidelines.
HUD Agency Guidelines Versus Lender Overlays
Gustan Cho Associates does not have any overlays on FHA Loans. We only go by HUD Guidelines.
The Federal Housing Administration, a subsidiary of the United States Department of Housing and Urban Development ( HUD ) classifies collection accounts into two categories:
- Non-medical collection accounts
- Medical collection accounts
HUD does not require that collection accounts with balances to be paid off in order to qualify for FHA Loans:
- However, there two categories of collection classifications are treated differently
Qualifying for FHA Loan With Medical Collections And Charge Offs are lenient with FHA than other loan programs.
How FHA Treats Non-Medical Collection Accounts
Qualifying for FHA Loan With Non-Medical Collection Accounts are different than qualifying for FHA Loan With Medical Collections And Charge Offs.
- Again, FHA does not require consumers to pay off prior old collection accounts, whether they are non-medical collection account or medical collection accounts
- However, if non-medical collection account balances on credit report are greater than $2,000, then HUD will require lenders to take 5% of the unpaid collection balance and use that as a monthly debt obligation in the calculation of borrower’s debt to income ratio calculations
This holds true even though the borrower does not have to pay that 5%.
How FHA Treats Medical Collections And Charge Offs
HUD treats medical collection accounts totally differently.
- Any medical collection accounts with balances can be ignored by lenders
- It does not matter how much the medical collection account is
- Medical collection accounts do not count
- Unlike non-medical collection accounts with balances, medical collection accounts with outstanding balances are not subject to the 5% calculation of the outstanding collection balance in calculating the borrower’s debt to income ratios
- Charge offs do not matter and are considered zero balance debts
This is even though there is an outstanding balance on the borrower’s credit report.
What Are Charge Offs And How Does FHA Treat Charge Offs
When a consumer defaults on their creditor and not pay the agreed-upon monthly payments, that account will go into the creditor’s collections department.
- The collections department of the creditor will try to contact the consumer and try to collect on the debt or try to make payment arrangements
- Sometimes creditors will give a reduced payoff and try to settle the debt
- However, there are times when consumers cannot pay due to unemployment or other financial crisis or extenuating circumstance
- After trying to collect for three to six months, some creditors will write off the debt
Writing off the debt is called charge off.
FHA Loan With Medical Collections And Charge Offs: How Charged-Off Accounts Are Reported On Consumer Credit Reports
Charged off accounts are reported on the consumer’s credit report as a charged-off account:
- HUD exempts charge offs and charge offs does not matter when qualifying for FHA Loans
- Even if the consumer wants to pay a charged off credit account, most creditors cannot accept any payment because they zeroed out their books
- This means that the outstanding collection balance was written off their books
- Medical and non-medical charge off accounts does not matter
Borrowers can qualify for FHA Loans with charged-off accounts on their credit reports.
Qualifying For FHA Loan With Credit Disputes
- Credit Disputes is when consumers want to do credit repair and will dispute a derogatory credit item to the three credit reporting agencies
Most consumers will write a credit dispute letter and send it via certified mail to the three credit reporting agencies:
Once the credit bureaus receive the credit dispute letter, they need to contact the creditor where the consumer is disputing.
How Credit Disputes Work
- Creditor normally has 30 days, no later than 45 days, to validate the credit dispute and send proof to the credit bureaus
- If the creditor does not send the validation to the credit reporting agencies, the credit reporting agencies need to remove the disputed derogatory item off the consumer’s credit report
- Unfortunately, credit bureaus do not abide by federal laws and do not remove the derogatory disputed items and just leave the credit dispute on the consumer’s credit report for months
There are rules and regulations with credit disputes when it comes to the mortgage approval process.
Credit Disputes On Non-Medical Items And Charge Offs
As mentioned earlier, borrowers can qualify for a home loan with collection accounts with outstanding balances and charge offs.
- However, consumers with credit disputes on non-medical collection accounts with a total aggregate of $1,000 or more in the outstanding balance on non-medical collection accounts need to have any credit disputes retracted
- Need to retract those credit disputes
- Once consumers retract the credit disputes, the chances are credit scores will drop
This can mean borrowers may not qualify for a mortgage if credit scores are currently borderline in meeting the minimum credit score requirements.
Qualifying For An FHA Loan With Medical Collections And Charge Offs
Homebuyers can qualify for an FHA Loan with charge offs. HUD allows lenders to ignore charge off accounts. However, we cannot have credit disputes on charge off accounts. Credit disputes on charged-off accounts need to be removed in order for the mortgage approval process can proceed.
Borrowers are allowed to have credit disputes on zero balance non-medical collection accounts and on non-medical collection accounts if the total outstanding collection balance on the credit report is less than $1,000.
Credit Disputes On Medical Collection Accounts
Medical collection accounts are exempt with credit disputes. Borrowers can have credit disputes on medical collection accounts with outstanding balances. It will not affect the mortgage loan application and approval process. Borrowers can have credit disputes on medical charge off accounts.