FHA Loans With Collection And Charge Off Accounts

Gustan Cho Associates
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FHA Loans With Collection And Charge Off Accounts

This BLOG On Qualifying For FHA Loans With Collection And Charge Off Accounts Was UPDATED On June 15th, 2019

FHA Loans With Collection And Charge Off Accounts
Gustan Cho Associates

Home Buyers who are looking to get qualified for a purchase mortgage loan or a refinance mortgage loan can qualify for FHA Loans without having to pay outstanding collections and charge offs. HUD Guidelines state that borrowers can qualify for FHA Loans With Collection Accounts And Charge Off Accounts. Mortgage Borrowers should also keep in mind that paying off an old collection account or charge off account can drop credit scores.

  • Paying off an old open collection account can drop a person’s credit score by 40 points or more
  • The reason is that by paying older collections and charge off accounts will re-activate the date of last activity
  • A sudden credit score drop can instantly disqualify a mortgage loan borrower due to not meeting the minimum credit score requirement
  • Minimum credit score required to qualify for a 3.5% down payment FHA Loan is 580 FICO

Qualifying For FHA Loans With Collection And Charge Off Accounts

Qualifying For FHA Loans With Collection And Charge Off Accounts
Gustan Cho Associates

Home Buyers can qualify for FHA Loans With Collection And Charge Off Accounts without paying off the outstanding collection balance. Home Buyers who want to purchase a new home usually check their own credit report and credit scores before they even consult with a mortgage loan officer.

  • When consumers pull their credit report, they realize that their scores are not bad but may see older collections and charge off accounts that have been aged
  • Then they take the initiative by paying off the old collection accounts
  • Many mortgage applicants assume that they will not qualify for FHA Loans with outstanding collections and charge off accounts
  • Other assume that paying off outstanding collections and charge offs will increase their credit scores.
  • That is definitely not the case
  • HUD Guidelines On Collections And Charge Offs does not require borrowers to pay outstanding collections and charge offs to qualify for FHA Loans

Paying Off An Old Collection Account Re-actives The Date Of Last Activity

Paying Off An Old Collection Account Re-actives The Date Of Last Activity
Gustan Cho Associates

If a mortgage loan borrower, for example, has a credit score of 570 FICO and needs to get to a 580 FICO credit score, they are not going to get a credit score boost by paying off older outstanding collections and/or charge off accounts.

  • The effect will be the opposite
  • Paying off outstanding collections and charge offs will most likely drop their credit scores
  • The reason is that it will re-activate the date of last activity
  • It will also re-activate the statute of limitations

Old Collection Accounts Have Little To No Impact On Credit Scores

Old Collection Accounts Have Little To No Impact On Credit Scores
Gustan Cho Associates
  • Common sense dictates that by paying off collection accounts should improve credit scores
  • However, the credit score computer has a brain of its own in calculating a person’s credit score
  • The derogatory item on credit score has less and less impact on credit score as time goes by
  • Old collection accounts that are over 2 years old will have very little or no impact on credit scores
  • Paying off an old collection account can drop credit scores? 
  • Paying off an old collection account can drop credit scores? 
  • Let me restate that: Not will paying off an old collection account can drop credit scores but will drop credit scores
  • What happens is that the delinquent collection account that had no impact on credit scores will suddenly get revived and will now have an impact on credit scores

Borrowers Can Still Qualify For Home Loan With Unpaid Collection Accounts

Borrowers Can Still Qualify For Home Loan With Unpaid Collection Accounts
Gustan Cho Associates

FHA Borrowers can still get FHA Loans With Collection And Charge Off Accounts.

  • If the mortgage lender requires to pay off a particular open collection account due to their FHA Lender Overlays, borrowers can pay off the collection at closing
  • Borrowers should with loan officer prior to credit repair or paying outstanding collections
  • Mortgage brokers/bankers do not charge anything for consultation and the only way they get paid is once the mortgage loan closes

Related> Can I Qualify For Mortgage With Old Collection Accounts?

Related> FHA Guidelines on Collection Accounts

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