What Are Common FHA Overlays On Collection Accounts And Charge Off Accounts

Typical FHA Overlays On Collection Accounts And Charge Off Accounts

FHA Loans is the most popular mortgage loan program in the United States. FHA stands for the Federal Housing Administration and is part of HUD. The United States Department of Housing and Urban Development, or HUD, is the parent of the Federal Housing Administration or FHA. FHA is a governmental entity and is not a mortgage lender. Many consumers think that the Federal Housing Administration is a mortgage lender and that FHA originates, fund, and service FHA Loans. However, this is not the case. The role of FHA is to insure FHA Loans that has been originated by FHA approved banks and mortgage companies in the event the FHA mortgage borrower were to default on their FHA Loans. In order for a FHA Loan to be insurable, FHA mortgage lenders need to be FHA approved mortgage lenders and every FHA Loan they originate and fund need to meet the minimum FHA mortgage lending guidelines. In the event if the FHA Loan does not meet the minimum FHA mortgage lending guidelines, that FHA Loan is not insurable. That is why FHA mortgage lenders are extremely careful when underwriting FHA Loans.

FHA Guidelines

FHA sets minimum mortgage lending guidelines. FHA mortgage guidelines are outlined on HUD’s 4000.1 FHA Handbook which has been launched last September 14, 2015 and outlines all of the minimum FHA mortgage lending requirements that all FHA approved mortgage lender need to follow. However, HUD approved mortgage lenders can set additional mortgage lending guidelines that surpass the minimum FHA loan requirements. These additional mortgage lending requirements that are in additional to the minimum FHA lending guidelines are called FHA lender overlays .  Many mortgage lenders have FHA Overlays On Collection Accounts And Charge Off Accounts. We will be covering common FHA Overlays On Collection Accounts and Charge Off Accounts on this blog.

FHA Overlays On Collection Accounts And Charge Off Accounts: What FHA Says About Collection Accounts And Charge Off Accounts

FHA does not require you to pay off collection accounts and/or charge off accounts for you to qualify for a FHA Loan. Over 70% of my mortgage loan borrowers who I qualify and close on their home loans are folks who have either gotten a last minute mortgage loan denial or could not qualify for a FHA Loan with a particular mortgage lender due to that mortgage lender FHA overlays on collection accounts and charge off accounts. Many mortgage lenders require that the borrower pay off outstanding collection accounts and/or charge off accounts in order for them to qualify for a FHA Loan even though FHA says that you DO NOT have to pay off your outstanding collection accounts and/or charge off accounts to qualify for a FHA Loan. FHA will insure a HUD approved mortgage lender on a FHA Loan they originate and fund even though the borrower has outstanding and unpaid collection accounts and charge off accounts. However, the HUD approved mortgage lender often will require that even if FHA gives it their blessing and not require to pay off collections and charge off accounts, they will set their own standards with FHA Loans, called FHA lender overlays, and require them to pay it off.  FHA Overlays On Collection Accounts And Charge Off Accounts differ from mortgage lender to mortgage lender. I, for instance, do not have any FHA Overlays On Collection Accounts And Charge Off Accounts. Whatever the minimum FHA Guidelines whatever it states on the automated findings, that is what I go by. We have no FHA Overlays On Collection Accounts And Charge Off Accounts. Whatever FHA Says About Collection Accounts And Charge Off Accounts, that is what we go by. FHA says collection accounts and charge off accounts do not have to be paid off to qualify for FHA Loans. FHA classifies collection accounts into three categories:

  1. Non-Medical Collection Accounts
  2. Medical Collection Accounts
  3. Charge Off Collection Accounts

FHA Overlays On Collection Accounts And Charge Off Accounts: DTI Calculations And Collection Accounts

As mentioned earlier, HUD classifies collection accounts into three different categories:

  1. Non-Medical Collection Accounts
  2. Medical Collection Accounts
  3. Charge Off Collection Accounts

FHA does require that FHA lenders take into account outstanding unpaid non-medical collection accounts into the borrower’s debt to income ratio calculations if the outstanding unpaid collection accounts total more than $2,000. If the sum of the outstanding non-medical collection accounts is greater than $2,000, FHA mortgage underwriters need to take 5% of the outstanding non-medical collection account balance and use it as a monthly debt payment of the borrower and use that figure to calculate the borrower’s debt to income ratios even though the borrower does not have to pay for it. If the 5% of the outstanding collection account balance is a large amount and will disqualify the borrower, then the borrower can enter into a written payment agreement with the creditor and whatever written monthly payment agreement that is agreed upon on the written payment agreement, that monthly amount will be used as a monthly debt payment in the calculation of the borrower’s DTI in lieu of the 5% of the outstanding collection account balance. There is no minimum monthly payment seasoning requirements and the date the written payment agreement is executed is the date it will be in force.

Medical collection accounts are exempt from debt to income ratio calculations under FHA Guidelines On Collection Accounts and it does not matter the outstanding collection amount balance.

Charge off accounts are exempt from debt to income ratio calculations only if the FHA mortgage file gets an approve/eligible per Automated Underwriting System. If the FHA mortgage loan file is a manual underwrite, then 5% of the charge off account amount is taken into consideration as part of the borrower’s monthly debt and will be used in the borrower’s debt to income ratio calculations.

Common FHA Overlays On Collection Accounts And Charge Off Accounts

Just because FHA says that a borrower does not need to pay off outstanding collection accounts and charge off accounts, banks and mortgage lenders may say otherwise and have their own lending requirements besides what FHA says. This is called FHA Lender Overlays which are extra FHA requirements implemented by each individual FHA mortgage lender on top of the FHA minimum mortgage lending requirements. Common FHA Overlays On Collection Accounts implemented by a mortgage lender may be that a borrower cannot have any collection accounts and charge off accounts that are outstanding and needs to be paid off. Some mortgage lenders will require a two year seasoning requirement after a collection account and charge off has been paid off in order to qualify for a FHA Loan with their particular lending institution. Other mortgage lenders will implement a FHA lender overlay that a collection account or charge off account balance cannot be greater than $5,000 or may have a certain cap.

There are many borrowers who call me where they could not qualify at other mortgage lenders due to outstanding collection accounts or charge off accounts. One example, is a borrower who could not qualify at a mortgage company because he had $14,000 in outstanding collection accounts. The mortgage lender he went to wanted him to pay off his outstanding collection balance and make sure that a zero collection balance was reporting on his credit reports before they would proceed with processing his FHA Loan. Under FHA Guidelines, the borrower does not have to pay off that collection account. That borrower came to me and we ended up closing on his FHA Loan. If you are told that you do not qualify for a FHA Loan due to outstanding collection accounts or charge off accounts, please call me at 262-716-8151 or email me at gcho@gustancho.com. I have no lender overlays on outstanding collection accounts and/or charge off accounts and just go off the automated findings from the Automated Underwriting System.

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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