Updated FHA Mortgage Guidelines On Collection Accounts

FHA Mortgage Guidelines On Collection Accounts

The Federal Housing Administration allows mortgage loan applicants with open unsatisfied collection accounts to get mortgage loan approvals without having to pay the balances of the unpaid collection accounts.  However, many mortgage lenders do have overlays that require open unpaid collection accounts to be paid.  What are overlays?  Mortgage lender overlays are when a mortgage lender adds additional qualifying mortgage requirements on top of the FHA mortgage guidelines on collection accounts. For example, to qualify for a residential mortgage loan via a FHA insured mortgage loan, the minimum credit score required is 580 FICO.  However, many banks, credit unions, and mortgage bankers may have their own lender overlays where they will set their own minimum credit score requirements such as requiring a minimum credit score of 640 FICO.   Same with collection accounts.

FHA Mortgage Guidelines On Collection Accounts And How Do Underwriters View Outstanding Collection Accounts?

The Federal Housing Administration does not require unpaid unsatisfied collection accounts to be paid in order for a mortgage loan applicant to get a FHA loan. FHA Mortgage Guidelines On Collection Accounts do not require mortgage loan borrowers to pay off outstanding collection accounts. FHA Mortgage Guidelines On Collection Accounts have different requirements for non-medical collections, medical collections, and charge off collection accounts.  However, many mortgage lenders have their internal mortgage lending overlays that open collection accounts be paid off in full in order for them to grant a FHA mortgage loan approval.  The reason why mortgage lenders have overlays on unpaid collection accounts is because they are concerned that the unpaid collection accounts can turn into judgments in the future.  If you are a mortgage loan applicant who has been denied for a FHA loan due to unsatisfied collection accounts in Illinois, Florida, Wisconsin, California, please contact me at 262-716-8151 or at www.gustancho.com.  I represent wholesale mortgage lenders who have no mortgage lender overlays and as long as you meet the minimum HUD or Fannie Mae mortgage lending guidelines, your mortgage loan application will get a mortgage loan approval.  Zero mortgage lending overlays.

2016 FHA Mortgage Guidelines On Collection Accounts

As mentioned earlier, you can qualify for a FHA insured mortgage loan with open unpaid collection accounts.  Prior to several months ago, open unpaid balances on collection accounts were zeroed out and did not impact a residential mortgage loan applicant’s debt to income ratios.  However, 2016 FHA mortgage guidelines on collection accounts have changed on unpaid collection accounts. New FHA mortgage guidelines on collections accounts have been implemented on unsatisfied collection accounts for FHA mortgage loan applicants.

NON MEDICAL COLLECTION ACCOUNTS

If you have non medical collection accounts with an aggregate unpaid collection balance of $1,000 or more, mortgage lenders need to take 5% of the unpaid collection balance into account towards calculating your debt to income ratios.  For example, if you have a total of $10,000 in unpaid collection account balance, 5% of the $10,000 or $500 will be counted as a monthly minimum payment and will be used towards the mortgage applicants debt to income ratios.  This is the new 2014 FHA guidelines on collection accounts and prior to recently, the unpaid collections balance did not matter.  Those with many unpaid collection accounts can be affected by the new 2014 FHA guidelines on collection accounts.

FHA Mortgage Guidelines On Medical Collection Accounts

Medical collection accounts are treated differently than non medical collection accounts and are exempt from 2016 FHA mortgage guidelines on collection accounts.  Whatever the balance is on unpaid medical collections, a percentage of the unpaid collection account balance will not be used towards a set minimum monthly payment and will not affect the mortgage loan applicants debt to income ratios.

As mentioned on our earlier blogs, a credit dispute is not acceptable during the mortgage application process.  New 2016 FHA guidelines concerning credit disputes require that you cannot have any non medical credit disputes on any derogatory credit item that is larger than $1,000.  Your mortgage application process will be halted if you have any disputes with any credit reporting agency or creditor on derogatory credit items with a credit balance above $1,000.  You need to retract the credit dispute in order for your mortgage application process to continue.  Unfortunately, when you retract a credit dispute on a derogatory credit item with a credit balance, your credit scores will most likely drop.  There have been cases where a credit dispute retraction has dropped a mortgage applicant’s credit score by almost 100 FICO points.   If you have collections that have zero credit balances, then the above rules on dispute retraction does not apply.  You can dispute negative derogatory credit items with zero balances.

What If  I Have Large Collections And The 5% Rule Will Yield A High Debt To Income Ratio?

If you have  substantial unpaid collection accounts, the new 2016 FHA guidelines on collection accounts can pose a problem.  Remember that mortgage lenders will now require that 5% of the unpaid collection balance to be used towards calculating a mortgage loan applicant’s debt to income ratios.  A $20,000 unpaid collection account will add an additional $1,000 towards the mortgage loan applicant’s monthly expenses and this can most likely disqualify the mortgage loan applicant for a mortgage loan.  The good news is that if you are in this situation, FHA will allow the mortgage loan applicant to set up a payment agreement with the collection company and use the monthly payment agreed upon towards calculating the debt to income ratios.  On the $20,000 unpaid collection issue, if the mortgage loan applicant has set up a payment agreement with the collection agency that they will pay $50.00 per month for so many years, then the $50.00 payment will be used towards the monthly expense instead of the 5% of the $20,000, or $1,000 per month.  There is no seasoning requirements to this rule and as long as the payment agreement is into effect, the mortgage lender will use the

If you have medical collection accounts with a credit balance, the above rule does not apply.  You can dispute a derogatory medical collection credit item with a balance and are exempt from the dispute rules and regulation.

 Do Not Pay Off Old Collection Accounts Without Negotiating

If you decide to pay off an old collection account, do not pay them a cent until you can get a pay for delete agreement with the collection agency.  If you decide to settle on a collection account on pennies on the dollar, make sure that part of your agreement is to have the collection agency delete your derogatory collection item as part of the payoff.  Do not pay off any collections without addressing your credit reporting issues.  Remember that paying an old collection account will reactivate your credit derogatory item which will drop your credit scores.  Your credit scores can drop as much as 100 points when you re-activate an old derogatory collection item.

Gustan Cho

www.gustancho.com

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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