Home Loan With Bad Credit And Outstanding Collections

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Home Loan With Bad Credit And Outstanding Collections

This BLOG On Home Loan With Bad Credit And Outstanding Collections Was UPDATED On May 22nd, 2018

Home buyers can qualify for a home loan with bad credit.

  • By home loan with bad credit borrowers can qualify for mortgage with prior bad credit such as the following:
  • However, borrowers needs to have been timely on their payments for the past 12 months to get an approve/eligible per Automated Underwriting System Findings (AUS)
  • Lenders do understand borrowers can have had extenuating circumstances in the past such as the following:
    • a job loss
    • business loss
    • medical issues
    • divorce
    • other extenuating circumstances that could have caused an economic impact in their lives and hurt their credit scores and have derogatory items on their credit reports

Charge Off Accounts

Home Buyers with outstanding collection and charged off accounts can qualify for FHA, VA, Conventional Loans. Borrowers do not have to contact their creditors or collection agencies that has written off their debts in order to qualify for owner occupant home loans:

  • These charged off debts are reported as charge off accounts  or profit and loss on consumer credit reports
  • HUD guidelines on charge off accounts is that they are excluded
  • Does not count even though a balance is showing on credit report
  • Medical collections and charged off accounts do not count negatively when applying for FHA, VA, Conventional Loans
  • There are lenders that view medical collections and charge offs as a negative
  • Many may have overlays where they require borrowers to pay them off
  • However, if that is the case, go to a different lender where they have no investor overlays
  • Overlays are individual mortgage lender guidelines that are above and beyond the lending guidelines of FHA, VA, Fannie Mae, Freddie Mac

Medical Collections

Medical collection accounts with balances does not matter when applying for home loan with bad credit:

  • FHA, VA, Fannie Mae, Freddie Mac categorizes medical and non-medical collections into separate categories and treats them differently
  • Again, medical collection accounts even with unpaid credit balances is normally ignored by FHA and VA Lender
  • FHA has the most lenient guidelines when it comes to outstanding collections and charged off accounts

Non-Medical Collections

Non-medical collection accounts are collection accounts that is non-medical such as the following:

  • auto loans
  • credit cards
  • installment loans
  • utility accounts
  • cell phone accounts
  • other collection accounts.

Borrowers can have unpaid collection accounts and still qualify for a FHA Loans. However, if total balance is $2,000 or greater on your collection account the following applies:

  • Then 5% of the unpaid collection account balance will be used towards hypotheticaldebt to income ratio calculations
  • If the 5% calculations of the unpaid collection account balance will overthrow the debt to income ratio cap then borrowers can have a written payment agreement with creditors and/or collection agency
  • Whatever the minimum payment agreement that is agreed upon will be used to calculate the debt to income ratios in lieu of the 5% of outstanding balance

The above rules and regulations on derogatory credit tradelines taking 5% of outstanding balance only applies to non-medical collections. Charged off accounts and medical collections are excluded from the 5% rule.

Credit Repair And Credit Disputes

Credit disputes is a major problem. Any outstanding credit disputes on derogatory credit items with the exemption of medical collections will halt the mortgage application and approval process.

  • Most folks who go through a credit repair program dispute the derogatory items on their credit reports in hopes of the creditor not responding
  • If creditors do not respond or validate credit disputes within 30 days, federal law states that credit bureaus needs to remove disputed item in question
  • Unfortunately, cannot have credit disputes on non-medical derogatory items which has an aggregate unpaid balance of $1,000 or greater
  • Cannot have credit disputes on charge off accounts, late payments, public records, or any other derogatory credit accounts
  • Consumers need to have the disputes retracted in order for the mortgage approval process to proceed
  • Medical collection account credit disputes are exempt from credit disputes

Related> Borrower credit analysis: HUD

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