FHA Loan With Unpaid Collection Accounts Mortgage Guidelines

This BLOG On FHA Loan With Unpaid Collection Accounts Mortgage Guidelines Was UPDATED And PUBLISHED On April 20th, 2020

FHA Loan With Unpaid Collection Accounts
Gustan Cho Associates

Can Home Buyers Qualify For FHA Loan With Unpaid Collection Accounts?

Many home buyers are confused about whether or not they can qualify for an FHA loan With Unpaid Collection Accounts.

  • Many home buyers go to their local banks, credit unions, and mortgage brokers and are told that they do not qualify for FHA Loan With Unpaid Collection Accounts
  • They are often told they need to pay outstanding collections and charged-off accounts when they go on the internet and search the world wide web and research and look into blogs
  • They are told that they can qualify for FHA Loan With Unpaid Collection Accounts without having to pay off the outstanding collection account balance
  • So who is right and who is wrong?

In this article, we will discuss and cover FHA Loan With Unpaid Collection Accounts Mortgage Guidelines.

Mortgage Guidelines On FHA Loan With Unpaid Collection Accounts

The reason why so many mortgage lenders tell home buyers that they cannot qualify for an FHA loan With Unpaid Collection Accounts is due to their own lender overlays:

  • Lender overlays are lending requirements that are in addition to the minimum FHA Lending Guidelines that are set by the United States Department of Housing and Urban Development, also known by many as HUD
  • HUD is the parent of the Federal Housing Administration or FHA
  • FHA does not require borrowers to pay off unpaid outstanding collection accounts in order to qualify for an FHA Home Loans
  • However, most lenders, especially banks, will require that outstanding collection accounts be paid off in full in order for borrowers to qualify with their financial institution
  • This is not necessary if borrowers choose lenders like Gustan Cho Associates Mortgage Group
  • GCA Mortgage Group is a national direct lender with no overlays on outstanding collection accounts

Borrowers will not need to pay off any unpaid outstanding collection accounts in order for them to qualify for an FHA loan.

Mortgage Guidelines On FHA Loan With Unpaid Collection Accounts And Charge Offs

FHA divides collection accounts into two categories:

  1. Medical Collection Accounts
  2. Non-Medical Collection Accounts

Medical Collection Accounts are treated much more favorably than non-medical collection accounts.

  • With HUD Guidelines, borrowers can have unpaid outstanding medical collection accounts
  • None of it will be taken into account when calculating the borrower’s debt to income ratios
  • However, with non-medical collection accounts, the borrower does not have to pay off any outstanding unpaid collection account balance

But 5% of the unpaid outstanding collection account balance will be taken into consideration on any collection balance that is greater than $2,000 in debt to income ratio calculations.

Mortgage Guidelines On Medical Versus Non-Medical Collections

What are the guidelines for mortgages for medical and non-medical collections?

Even though borrowers do not have to make any payments on any unpaid outstanding collection account balance, 5% of the outstanding collection account will be used and treated like a monthly debt of the borrower.

  • This 5% rule can disqualify many borrowers if the outstanding unpaid collection account balance is a large amount

For example, here is a case scenario:

  • if an FHA borrower has a total of $20,000 in unpaid outstanding collection account balances
  • then 5% of the $20,000 or $1,000 will be treated as a monthly debt
  • this holds true even though the borrower does not have to pay that amount
  • That $1,000 per month is equivalent to a $200,000 mortgage P.I.T.I. and can automatically disqualify any borrower due to exceeding the maximum debt to income ratio caps
  • However, for those who have a substantial outstanding unpaid collection account balance, FHA will allow the debtor to enter into a written payment agreement with a creditor
  • Whatever the monthly payment agreement is, that payment agreement can be used in lieu of the 5% of the unpaid outstanding collection account balance in the calculations of the borrower’s debt to income ratios
  • Again, this only applies for non-medical collection accounts with outstanding balances and not medical collection accounts
  • Medical collection accounts can be exempt no matter how much the unpaid outstanding medical collection account balance is

This holds true unless the particular lender the borrower chooses has overlays on unpaid outstanding collection accounts.

FHA Loan With Unpaid Collection Accounts: Charge Off Accounts

Borrowers can qualify for FHA Loans with charged-off accounts.

  • Charge off accounts are not calculated on the debt to income ratio calculations of Borrowers and do not have to be paid off
  • There are many mortgage lenders that have overlays on charge off accounts where they want the borrower to pay off the charge off accounts
  • However, that is not necessary
  • Borrowers who consult a lender and the lender mandates to pay off the charge off accounts or unpaid outstanding collection accounts, please contact us at 262-716-8151 or text us for a faster response
  • Or email us at gcho@gustancho.com
  • Gustan Cho Associates Mortgage Group has no lender overlays on outstanding collection accounts and charged-off accounts

Charge off accounts have balances reflected on them on consumer credit reports. That balance means that that amount was charged off and that does not mean that the amount listed on the charge off account is what the consumer owes.

FHA Loan With Unpaid Collection Accounts And Mortgage Charge Off Accounts

There are times where Borrowers had a prior foreclosure and/or deed in lieu of foreclosure and there is a mortgage charge off after the borrower’s home loan has been foreclosed on.

  • There is no waiting period after a second mortgage charge off
  • There is a three year waiting period after a first mortgage charge off date which is reflected on the consumer’s credit report with an outstanding unpaid balance on a mortgage charge of
  • This applies for both a first mortgage charge off

The waiting period after a mortgage charge off is four years from the date of the mortgage charge off date which is reflected on the borrower’s credit report to qualify for a conventional loan by Fannie Mae and/or Freddie Mac.

Qualifying With Lender With No Overlays

How to qualify with a lender without overlays

Borrowers who are told they do not qualify for an FHA loan With Unpaid Collection Accounts by a bank or different mortgage lender, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. We do not have any FHA Investor Overlays with not just collection accounts but also with any other government and conventional loans. We just go off the automated findings of the Automated Underwriting System and do not impose any investor FHA overlays. We are available 7 days a week, evenings, weekends, and holidays.

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