This BLOG On Home Loan With Unpaid Collection Accounts Mortgage Guidelines Was UPDATED On December 12th, 2018
How To Qualify For Home Loan With Unpaid Collection Accounts:
There are multiple different types of loan programs.
- Each loan program has their own set of mortgage guidelines when qualifying for home loan with unpaid collection accounts
- The most aggressive program for borrowers with 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
- There are many instances where VA borrowers will not get an approve/eligible per Automated Underwriting System Automated Findings on VA Loan
- This is due to their outstanding collections but will get an AUS Approval with a FHA Loans
Steps To Take In Qualifying For Home Loan With Unpaid Collection Accounts
Most homebuyers believe that having prior collection accounts will disqualify them for a mortgage loan.
- They also believe that by paying unpaid collection accounts will increase their credit scores and improve their overall credit profile
- 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 in getting a mortgage loan approval
In this article, we will cover and discuss qualifying for a mortgage with outstanding collections.
Paying Off Collection Accounts Will 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 accounts can plummet one’s credit scores by 40 points or more
- This is because it re-activates the date of 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 Collection Accounts 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 on credit scores
- Consumers who have old unpaid collection accounts and charge offs, leave them alone
- HUD does not require to pay 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.
Lenders Will Approve Mortgage With Unpaid Collection Accounts
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, if 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
- In the event, if the lender requires that unpaid collection accounts be satisfied, it can be paid at closing
- Most of my mortgage loan clients who have open 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.
FHA Guidelines For A Mortgage With Unpaid Collection Accounts
New FHA Guidelines are now in effect with regards to unpaid collection accounts as of 2017.
There are two categories of collection accounts under the eyes of the Federal Housing Administration.
- Medical Collection Accounts
- 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, FHA will only allow up to an aggregate unpaid amount of $1,000
- Unpaid collection accounts of more than $1,000
- FHA 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.