Tips On How To Boost Credit Scores With Recent Collection Account On Credit Report

This Blog On How To Boost Credit Scores With Recent Collection Account On Credit Report Was Written By Gustan Cho NMLS 873293

Mortgage borrowers can qualify for FHA Loans with outstanding collection accounts as well as charge off accounts without having to pay them off. The United States Department of Housing and Urban Development, commonly referred as HUD, is the parent of the Federal Housing Administration, known as FHA. Many Americans are under the impression that FHA is a governmental agency that is a mortgage lender. However, FHA is not a mortgage lender and has nothing to do with the origination or funding of FHA Loans. FHA is a subsidiary of the United States Department of Housing and Urban Development, HUD, and was created to to promote home ownership to every day hard working Americans without the need of a substantial down payment. The role of FHA is to work with private mortgage lender and banks and encourage them to lend money to home buyers with little down payment and lenient credit requirements and standards. Most banks and mortgage lenders are extremely careful with originating and funding home loans to borrowers with little down payment because they do not have skin in the game. Mortgage lenders and banks are also extremely credit conscious and are very careful in funding borrowers with prior credit issues such as bankruptcies, foreclosures, deed in lieu of foreclosures, short sales, judgments, tax liens, outstanding collection accounts, charge off collection accounts, and late payments.

Can I Get FHA Loan With Bad Credit?

FHA Loans are one of the most popular mortgage loan program in the United States. FHA Loans has very generous lending requirements for home buyers where a home buyer with a 580 FICO credit score can purchase a home with only a 3.5% down payment with a low mortgage rate. How can this be? The reason why lenders are willing to finance home buyers with less than perfect credit and higher debt to income ratios as well as little down payment on FHA Loans is because FHA Loans are insured by HUD in the event if the borrower defaults on their FHA Loan. In order for HUD to insure defaulted FHA Loans, the lender needs to follow FHA Guidelines when processing and underwriting a FHA Loan. FHA have minimum mortgage lending requirements, especially with regards to credit scores and collection accounts. Minimum credit scores required to qualify for FHA Loans is 580 FICO but there are big lending requirements for borrowers with credit scores under 620 FICO and over 620 FICO.

Cases Where Borrowers Need Higher Credit Scores

Even though FHA only requires a 580 FICO credit score to qualify for a FHA Loan, there are times where a borrower needs to have a 620 FICO credit score to qualify. Lenders need to submit a borrower’s mortgage application and credit report to Automated Underwriting System in order to proceed with a borrower’s mortgage process. If the Automated Underwriting System issues an automated approval, the borrower needs to satisfy all of the conditions of the AUS findings. Lenders have tougher requirements for borrowers with under 620 FICO scores and so does HUD. For example, debt to income ratio requirements on borrowers under 620 FICO is capped at 43% DTI where if a borrower has over 620 FICO credit scores, the debt to income ratio can go up to 56.9% DTI. The Automated Findings may require Verification Of Rent for borrowers with under 620 FICO credit scores. Mortgage rates under 620 FICO are substantially higher than rates priced over 620 FICO.

Recent Collection Account On Credit Report

A recent collection account on your credit report can be extremely damaging to your credit scores. One recent collection account can mean that you may no longer qualify for a home loan and may take months to get your credit scores back up to where you can meet the minimum credit score requirement to qualify for a FHA Loan . The purpose for me writing this blog is to help our viewers a few tricks of the trade where you can easily spike up your credit scores temporarily to boost up your credit scores when you have a recent collection account that appears on your credit report. Many times, collection agencies sell your dormant collection account for pennies on the dollar and whenever they do that, it may update your credit report as a recent collection account where it can plummet your credit report.

How Does Credit Disputes Affect Mortgage Process

There are strict rules and regulations on credit disputes during the mortgage process . Credit disputes are when a consumer disputes a derogatory erroneous credit item on their credit report to the credit bureaus in hopes of getting it corrected and/or removed from their credit report. The way it works is by writing a letter to the credit bureaus stating that the derogatory information on the credit report is wrong and to have the credit bureaus remove it. The credit bureaus will notify the creditor reporting the disputed item and that creditor has 30 days to provide the validity of the reported item to the credit bureaus. If the credit bureaus do not get a response back by the creditor, the credit bureaus need to remove them off the consumer’s credit report. If the creditor does respond with proof of the derogatory credit item, the disputed credit item remains on the credit report. Many consumers and/or credit repair companies use this credit dispute method in hopes of removing derogatory credit items off one’s credit report. Unfortunately, you cannot have credit disputes on charge off accounts and non-medical collection accounts if your total outstanding collection account balance is greater than $1,000 during the mortgage process. You are allowed to have credit disputes on medical collection accounts and you can also have credit disputes on non-medical collection accounts with zero balances on them. Credit disputes on medical collection accounts as well as non-medical collection accounts without any outstanding balances are permitted and do not have to be retracted.

Why Are Credit Disputes Prohibited During Mortgage Process?

Whenever a consumer does a credit dispute on a derogatory credit, the credit bureau will remove that particular derogatory credit item from the credit scoring formula so even though the derogatory credit item remains on the credit report and the verbiage of “consumer disputes this credit item” is added on the disputed item. What this means is that the consumer’s credit scores will go up since the derogatory credit item is not factored in on the scoring model. This is the reason why mortgage lenders will not allow credit disputes on non-medical collection accounts and charge off accounts. So when a consumer retracts the consumer credit dispute from a tradeline, the derogatory item will get re-factored into the credit scoring model and the consumer’s credit scores will drop. The amount on how much the credit scores will drop will depend on how recent the derogatory item is. Loan officers should not ever issue a pre-approval letter if a borrower has credit disputes on non-medical collection accounts with outstanding balances and charge off accounts.

How To Boost Credit Scores With Recent Collection Accounts To Qualify For Mortgage

As mentioned earlier, when you have a credit dispute, the mortgage process will come to a halt until the credit dispute is retracted and the retraction is posted on the consumer’s credit report. Also, if you do a credit dispute, the consumer’s credit scores will increase because the credit bureaus will take out the negative credit item from its credit scoring formula. Medical collections and non-medical collection accounts are exempt from credit disputes. If you had recent medical collection accounts or non-medical collection accounts with zero balances or the total outstanding unpaid balance of your non-medical collection accounts is less than $1,000, you can go ahead and do credit disputes and by doing so, your credit scores will increase. This is a good strategy that you can use to boost your credit scores if you need to meet the minimum credit score requirements. Your credit scores will drop once the credit dispute has been resolved and the credit bureaus were to state that the negative credit item has been verified by the creditor and that it will remain. However, if your loan officer pull credit, that credit score will be used throughout the mortgage process and it will be good for 120 days.

The information contained on Gustan Cho Associates website is for informational purposes only and is not an advertisement for products offered by The Gustan Cho Team @ Gustan Cho Associates or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates Mortgage & Real Estate Information Resource Center website and do not reflect the policy of Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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