FHA Overlays On Collection Accounts And Charge Off Accounts

This BLOG On FHA Overlays On Collection Accounts And Charge Off Accounts Was PUBLISHED On July 12th, 2019

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 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 have been originated by FHA approved banks and mortgage companies in the event the borrower were to default on their FHA Loans
• In order for an FHA Loan to be insurable, Lenders need to be HUD-approved mortgage lenders
• Every FHA Loan they originate and fund need to meet the minimum HUD mortgage lending guidelines
• in the event, if the FHA Loan does not meet the minimum HUD mortgage lending guidelines, that FHA Loan is not insurable
• That is why lenders are extremely careful when underwriting FHA Loans

In this article, we will discuss FHA Overlays On Collection Accounts And Charge Off Accounts.

HUD Mortgage Guidelines

HUD 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
• It outlines all of the minimum FHA mortgage lending requirements that all lenders need to follow
• However, HUD-approved lenders can set additional mortgage 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 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 And What HUD Says About Collection Accounts And Charge Off Accounts

HUD does not require you to pay off collection accounts and/or charge off accounts for you to qualify for an FHA Loan.

• Over 75% of our borrowers at Gustan Cho Associates who our team qualifies and close on their home loans are folks who have either gotten a last-minute mortgage loan denial or could not qualify for an FHA Loan with a particular mortgage lender
• This was due to that mortgage lender FHA overlays on collection accounts and charge off accounts

Many lenders require that the borrower pay off outstanding collection accounts and/or charge off accounts in order for them to qualify for an FHA Loan. This holds true even though FHA says that you DO NOT have to pay off your outstanding collection accounts and/or charge off accounts to qualify for an FHA Loan.

HUD Guidelines Versus Lender Overlays

FHA will insure a HUD-approved lender on an FHA Loan they originate and fund:

• This holds true even though the borrower has outstanding and unpaid collection accounts and charged off accounts
• However, the HUD-approved mortgage lender often will require that
• This holds true even if HUD 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 lender to lender
• Gustan Cho Associates, for instance, does 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 HUD Says About Collection Accounts And Charge Off Accounts, that is what we go by. HUD says collection accounts and charged 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 Versus 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

HUD does require lenders to 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, mortgage underwriters need to take 5% of the outstanding non-medical collection account balance
• Underwriters need to use it as a monthly debt payment of the borrower
• They need to use that figure to calculate the borrower’s debt to income ratios
• This holds true 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
• 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 are 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.

Medical Collection Mortgage Guidelines

Charge off accounts are exempt from debt to income ratio calculations only if the file gets an approve/eligible per Automated Underwriting System.

• If the 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 HUD says that a borrower does not need to pay off outstanding collection accounts and charge off accounts, lenders may say otherwise and have their own lending requirements besides what HUD says.

• This is called FHA Lender Overlays which are extra requirements implemented by each individual lender on top of the HUD minimum mortgage lending requirements
• Common FHA Overlays On Collection Accounts implemented by a lender may be that a borrower cannot have any collection accounts and charge off accounts that are outstanding needs to be paid off
• Some lenders will require a two-year seasoning requirement after a collection account and charge off has been paid off in order to qualify for an FHA Loan
• Other lenders will implement a lender overlay that a collection account or charge off account balance cannot be greater than $5,000 or may have a certain cap

Qualifying For FHA Loan With A Direct Lender With No Overlays

There are many borrowers who call me where they could not qualify at other 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 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 HUD Guidelines, the borrower does not have to pay off that collection account. That borrower came to us and we ended up closing on his FHA Loan. If you are told that you do not qualify for an FHA Loan due to outstanding collection accounts or charge off accounts, please contact us at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. We 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.