How Do Mortgage Lenders View Charge Offs And Collections

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How Do Mortgage Lenders View Charge Offs And Collections

This BLOG On How Do Mortgage Lenders View Charge Offs And Collections Was UPDATED And PUBLISHED On November 11th, 2019

How Mortgage Underwriters View Charge Offs

How Do Mortgage Lenders View Charge Offs? How Do Mortgage Lenders View Charge Offs And Collections depend on the mortgage company.

  • Mortgage Borrowers can have outstanding collections and charge off accounts and qualify for a mortgage with a lender with no overlays
  • For example, HUD, the parent of FHA, does not require borrowers to pay outstanding collections and charge off accounts to qualify for FHA Loans
  • However, many banks and mortgage lenders require that charge off accounts and outstanding collection accounts be paid off in order to qualify
  • This is not an FHA Guideline but rather a lender overlay
  • Gustan Cho Associates does not have any overlays on government and/or conventional loans

In this article, we will cover and discuss how do mortgage lenders view charge offs.

How Do Mortgage Lenders View Charge Offs Depend On The Particular Lender

How Do Mortgage Lenders View Charge Offs Depends On The Particular Lender

Many mortgage loan borrowers wonder if a charge off or multiple charged offs will disqualify them from getting a mortgage loan approval and the short answer to that is no. How Do Mortgage Lenders View Charge Offs and Collections depends on the particular lender the borrower consults with. Most lenders will have lender overlays on charge offs and collections. Under HUD, VA, and Fannie Mae/Freddie Mac Guidelines, borrowers do not have to pay outstanding collections/charge offs to qualify for mortgage loans.

  • FHA allows for mortgage borrowers to qualify for an FHA insured mortgage loan with prior charge offs
  • Charge offs will remain on credit report for 7 years from the date the creditor reported from the date of last delinquency
  • This is a federal law and is mandated and regulated by the FCRA, which is also known as the Fair Credit Reporting Act
  • Charge offs will initially have a negative impact on credit scores
  • However, after two years, charge offs will have very little or no impact on credit scores
  • All negative items, with the exception of a Chapter 7 bankruptcy, remains on credit report for a period of 7 years
  • After the 7 years are up, the three credit reporting agencies needs to remove them off the credit report
  • This 7 year period is called the statute of limitations and is enforced by the Fair Credit Reporting Act, FCRA

How Are Credit Card Delinquencies Reported?

How Are Credit Card Delinquencies Reported?

Consumers who have credit card accounts that are currently open, the three credit reporting agencies will post the most recent credit card payment history.

  • It does not matter whether credit card payments are being paid on time or are behind on payments
  • For credit card accounts that are closed, whether credit card payment histories have been on time or have been a late payer on them
  • On credit card accounts that have closed, the creditor will post the final closed status of the credit card account to the three credit reporting agencies.

Charge Offs: What Are Charge Offs

What Are Charge Offs

Charge offs are credit accounts where a creditor writes off the debt consumers owe them:

  • After they try to collect on them and deems it as an uncollectible debt (normally 4 months), the debt is normally charged off
  • The creditor can possibly sell charge offs to collection agencies or can pursue in getting a judgment issued
  • A mortgage loan borrower can still qualify for FHA Loans with charge offs and open collection accounts
  • Borrowers with charged off and collection accounts in the past and is still on credit report do not have to pay outstanding balance off to qualify for government and conventional loans
  • I deal with borrowers with prior charge offs and open collection accounts all of the time
  • We have no problem in closing on the mortgage loan without having to have them paid off as per HUD mortgage guidelines

Can I Qualify For A Mortgage Loan With An Outstanding Judgment?

Can I Qualify For A Mortgage Loan With An Outstanding Judgment?

A judgment is probably one of the worst derogatory items you can have on the credit reports if you intend in applying for a residential mortgage loan.

  • The good news is that I can still qualify borrowers and approve for a residential mortgage loan with an outstanding judgment
  • As long as the borrower has entered into a written payment agreement with the judgment creditor and made three payments
  • The borrower needs to provide three month’s of canceled checks and/or bank statements showing proof of payment to the judgment creditor

What Are Judgments?

What Are Judgments?

A judgment is when a creditor takes a consumer to court for not paying the debt and the court issues a judgment:

  • A judgment stays on credit report for a period for seven years
  • After 7 years, the judgment record needs to fall off the credit report
  • Even if borrowers were to pay off the judgment, the judgment report will remain on credit report
  • However, it will state it as SATISFIED JUDGMENT
  • Again, as with charge offs, a judgment will eventually plummet credit scores
  • But as time passes, it will have less and less impact on credit scores

Never Pay An Old Collection Account Or Delinquent Debt

why Never Pay An Old Collection Account Or Delinquent Debt

I do not want to provoke folks not to pay on their old debt obligations

  • But I strongly recommend not to pay an old collection account
  • Paying older dormant collections and charged-off accounts will re-activate the date of last activity and the statute of limitations on debt
  • Paying older collections and charge offs can lower borrowers credit scores
  • In the event, if mortgage lender with overlays on collections/charge offs requires borrowers to pay off some old collection accounts, do that at closing and not during the mortgage process
  • Paying off an old collection account will reactivate that credit account as a current account and credit score WILL DROP!!! 
  • I have seen so many times where borrowers made this mistake and hurt their chances in getting a mortgage loan approval

How Do Mortgage Lenders View Charge Offs And Qualifying With A Direct Lender With No Overlays

Home Buyers and/or Homeowners needing to qualify for a mortgage with a direct lender with no mortgage overlays, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. We are available 7 days a week, evenings, weekends, and holidays.

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