Home Loan With Unpaid Collection Accounts Mortgage Options

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In this blog, we will cover and discuss qualifying for home loan with unpaid collection accounts mortgage options. There are various home loan with unpaid collection accounts mortgage options. FHA, VA, USDA, Non-QM, and conventional loans all do not require outstanding collections to be paid. Many people get surprised when they hear that you can qualify for a conventional home loan with unpaid collection accounts. Yes, Fannie Mae Guidelines state collection accounts do not have to be paid on primary owner occupant conventional loans. In the following paragraphs, we will explain the various mortgage options in qualifying for a home loan with unpaid collection accounts.

Do You Have To Pay Off Collections To Get A Mortgage?

First time homebuyers with bad credit and collection accounts often ask do you have to pay off collections to get a mortgage? Homebuyers can qualify for home loan with unpaid collection accounts are not required to pay outstanding collection accounts on government and conventional owner-occupant primary home loans.

Non-QM Loans With Collection Accounts

Non-QM mortgages also do not require collections to be paid. However, each type of mortgage loan program has its own algorithm on the automated underwriting system on  analyzing outstanding collections, late payments, and other derogatory credit tradelines. There are multiple different types of loan programs. Each loan program has its own set of mortgage guidelines when qualifying for a home loan with unpaid collection accounts.

What Type of Mortgages Is Best For Borrowers With Collections?

The best most aggressive program for borrowers with a home loan with unpaid collection accounts are FHA loans. Although VA loans have very lax credit and debt-to-income ratio guidelines, FHA is much more lenient when it comes to qualifying for home loan with unpaid collection accounts. It is much easier to get an approve/eligible per the automated underwriting system (AUS on FHA loans than any other home loan with unpaid collection accounts.

What Mortgage Programs Has The Most Lenient Guidelines For Home Loan With Unpaid Collection Accounts?

There are many instances where VA borrowers with unpaid collections  will not get an approve/eligible per Automated Underwriting System Automated Findings on VA loan but will get an automated findings approval on FHA loans. Every mortgage loan program has its own algorithm when it comes to its approve/eligible per AUS standards. Borrowers may not get an AUS approval with high number of oustanding collections on VA, USDA, and conventional loans but may get an AUS Approval with an FHA loans.

Does FHA Require Past Due Accounts To Be Brought Current?

A very common frequently asked question at Gustan Cho Assciates is does FHA require past due accounts to be brought current? HUD, USDA, VA, Fannie Mae, and Freddie Mac does not require collection accounts, and non-mortgage charged-off accounts to be paid. However, accounts that are past due credit accounts that are not reported as a collection account and/or charged-off accounts needs the past due amount to be brought current in order for the borrower to be eligible for a home loan.

Can I Get an FHA With Collections?

Since FHA loans are the most popular loan for bad credit, the question often asked is can I get a FHA loan with collections? All home loans for primary owner-occupant homes do not require unsatisfied collection accounts to be paid. However, it is up to the automated underwriting system (AUS) to decide the automated approval. FHA loans  has the most lenient guidelines and is the best home loan with unpaid collection accounts. There is no other mortgage options that comes close than FHA loans for borrowers with larger collections. Although all government and conventional loans does not require you to pay unsatisfied collection accounts, it is ultimately up to the automated underwriting system to render an automated approval.

What Is The Best Mortgage Opton For Home Loan With Unpaid Collection Accounts?

The automated underwriting system will determine the number of collections, charged-off accounts, late payments. balance of all collections, history of the borrower having collections, and other derogatory credit tradelines. FHA, VA, USDA, Fannie Mae, and Freddie Mac have their own algorithm in determining collections and derogatory credit tradelines before rendering an automated approval. FHA automated underwriting system has the most lenient AUS algorithm when it comes to unsatisfied collection accounts. You can get FHA loans with unsatisfied collection accounts no matter how large the outstanding balance.

Can I Buy a House With Things in Collections?

A frequently asked question by first-time homebuyers is can I buy a house with things in collections? The short answer is YES. Most homebuyers believe that having prior collection accounts will disqualify them for a mortgage loan. They also believe that paying unpaid collection accounts will increase their credit scores and improve their overall credit profile. Per HUD, USDA, VA, Fannie Mae, and Freddie Mac, all owner-occupant primary home loans with unpaid collection accounts, the collections do not have to be paid. However, every lender can have higher lending requirements above the agency guidelines, which are called lender overlays. Individual lenders can have their own lending requirements, lender overlays, on collections and can require borrowers ot pay unsatisfied collections.

Why You Should Not Pay Unsatisfied Collections When Buying a House?

Homebuyers can qualify for a home loan with unpaid collection accounts. Prior to consulting a mortgage broker, many homebuyers take the initiative in paying off their old unpaid collection accounts so they can get a head start in getting a mortgage pre-approval. However, this is not the case and by taking the above actions in paying off unpaid collection accounts, they are probably ruining their chances of getting a mortgage loan approval. In this article, we will cover and discuss qualifying for a mortgage with outstanding collections.

Can Paying Off Collections Drop Credit Scores?

Most people do not realize that paying off an old collection account will drop their credit scores. Paying off old collection accounts can drop one’s credit scores. Paying off one collection account can plummet one’s credit scores by 40 points or more. This is because it re-activates the date of the last activity on the credit report. Paying off more than one collection account can easily drop credit scores. There are cases where it dropped scores by 100 points.

Old Unpaid Collections Have Little Effect on Credit Scores

Older unpaid collection accounts have very little or no impact on credit scores. Collection accounts that are 2 years old or older will not impact credit scores. Consumers who have old unpaid collection accounts and charge-offs, leave them alone. HUD does not require paying off outstanding collections and/or charge-off accounts to qualify for FHA loans. Do not pay off outstanding collections and charge-offs or do not do any credit disputes until consulting with a loan officer. The loan officer will advise on what actions to take.

Best Mortgage Lenders For Borrowers With Collections

There are lenders who do require that unpaid collection accounts be paid prior to or at the time of closing. However, there are many mortgage lenders that will not care whether unpaid collection accounts are satisfied or not, especially if they are older. In the event, that the mortgage lender requires that unpaid collection accounts be paid, do not pay them. Paying older outstanding collections and/or charge-off accounts will reactivate the delinquent account and credit scores can drop.

Do Lenders Have Different Requirements for Collections?

Not all mortgage lenders have the same requirements for home loan with unpaid collection accounts. Even though HUD, VA, USDA, Fannie Mae, and Freddie Mac do not require unsatisfied collection accounts to be paid, the individual lender can require collections to be paid as part of their lender overlays. Lender overlays are additional guidelines above the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mac.

What If My Lender Requires Me To Pay Unsatisfied Collections?

If your lender requires you to pay unsatisfied collections, you have two choices. The first choice is to move your loan to a different lender who has no lender overlays on a home loan with unpaid collection accounts. The second option is if you are too deep into the mortgage process and need to meet the closing date on the real estate purchase contract, you can pay the unsatisfied collection account. We will discuss more on how to pay unsatisfied collections in the next paragraph.

What Do I Do When My Lender Requires Me To Pay Unsatisfied Collections?

In the event, that the lender requires that unpaid collection accounts be satisfied, they can be paid at closing. Most of my mortgage loan clients who have unpaid collection accounts get mortgage approvals without needing to pay unpaid collection accounts. When a lender requires mortgage applicants to pay off outstanding collections and/or charge-offs, it is not HUD’S Guidelines. The reason these lenders require to pay outstanding collections and charge-offs is due to their lender overlays. Borrowers who do not want to pay off outstanding collections and/or charge off accounts can qualify for FHA loans with other lenders who do not have lender overlays.

Mortgage Guidelines on Medical Versus Non-Medical Collections

New FHA Guidelines are now in effect with regard to unpaid collection accounts. There are two categories of collection accounts under the eyes of the Federal Housing Administration.

1. Medical Collection Accounts
2. Non-Medical Collection Accounts

Medical Collection accounts are exempt with regards to unpaid medical accounts and are exempt from debt to income ratio calculations on outstanding balances. With Non-Medical unpaid collection accounts, HUD will only allow up to an aggregate unpaid amount of $1,000. Unpaid collection accounts of more than $1,000. HUD requires that 5% of the unpaid collection accounts balance be counted towards the mortgage loan borrower’s debt to income calculations. Borrowers do not have to pay the 5% of the unpaid collection accounts balance. But the 5% of the unpaid collection accounts balance will be used as a monthly debt payment in the calculations of debt to income ratios.

Related> New FHA Guidelines On Unpaid Collection Accounts

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