This ARTICLE On HUD Collection Accounts Mortgage Guidelines On FHA Loans Was PUBLISHED On November 4th, 2019
HUD is the parent federal agency for the Federal Housing Administration (FHA). FHA is not a lender.
- FHA is a federal agency in charge of insuring FHA loans that went into default
- Private lenders are the institutions that originate, process, underwrite, fund, and service FHA loans
- FHA will step in to partially guarantee the loss lenders sustained due to the borrowers defaulting and/or foreclosing on their FHA loans
- In order for FHA to insure losses on FHA loans, mortgage companies need to abide by the minimum HUD Guidelines on all FHA loans they originate and fund
- HUD Collection Accounts Mortgage Guidelines On FHA Loans are lenient
- Borrowers do not have to pay outstanding collections and/or charged-off accounts to qualify for FHA loans
- However, lenders can have overlays where they can require all derogatory credit tradelines that need to be current and/or paid off
- This holds true even though HUD Collection Accounts Mortgage Guidelines On FHA Loans do not require it
- The higher lending requirements imposed by lenders are individual lender overlays
- Gustan Cho Associates is one of the very few national lenders with no overlays on FHA loans
In this article, we will cover and discuss HUD Collection Accounts Mortgage Guidelines On FHA Loans.
Choosing A Lender To Qualify For An FHA Loan
Not all lenders have the same lending guidelines on FHA Loans.
- All mortgage companies need to have their borrowers meet HUD Guidelines
- However, mortgage companies can have higher standards and guidelines on top of the minimum HUD Guidelines on FHA mortgages
- For example, HUD requires a minimum credit score of 580 FICO to qualify for a 3.5% down payment FHA loan
- However, most lenders may require a minimum credit score of 620 FICO
- This holds true even though the borrower meets the minimum 580 credit score requirements per HUD Guidelines
- Borrowers who meet the minimum credit score requirements for a 3.5% down payment FHA home purchase loan may get denied by many lenders with overlays on credit scores
- The bottom line is just because a lender may say you do not qualify for an FHA loan does not mean another lender will not say YES
Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify for a home mortgage due to the lender overlays mortgage companies had.
HUD Collection Accounts Mortgage Guidelines Versus Lender Overlays
We will be discussing the HUD Collection Accounts Mortgage Guidelines versus typical lender overlays in this section:
HUD does not require borrowers to pay outstanding collections accounts to qualify for FHA loans:
- However, many lenders may require that all collections be paid as part of their lender overlays
HUD differentiates collections accounts into two categories:
- Medical collections
- Non-medical collections
- With non-medical collections, any outstanding balance over $2,000, the mortgage underwriter needs to take a hypothetical 5% of the outstanding balance and use it as part of DTI calculations
- If 5% of the outstanding balance is too much in DTI calculations, the borrower can enter into a written payment agreement
- The amount agreed in the written payment agreement will be used in lieu of the 5% of the outstanding balance
- Medical collections are exempt from the 5% rule
HUD Collection Accounts Mortgage Guidelines And Charged-Offs
Charged-off accounts do not have to be paid to qualify for FHA loans.
- This holds true no matter how large the charge off is
- Charged-off accounts are normally listed as Profit & Loss on consumer credit reports
- The 5% of the outstanding balance does not apply on charged-off accounts
Medical and/or non-medical charged-off accounts are treated the same.
Credit Disputes On Oustanding Collection Accounts
Credit repair can do more damage to borrowers than most people know.
- Credit disputes are not allowed on derogatory credit tradelines
- You cannot have credit disputes on late payments, collections, charged-off accounts during the mortgage process
- Medical collections are exempt
- Any collection accounts with zero balances are exempt from retraction
- Any credit disputes where the credit tradelines are at least two years old and/or older are exempt from retraction
- The reason why credit disputes are not allowed during the mortgage process is that the credit bureaus automatically negate the derogatory credit tradelines from the FICO scoring model
- This makes consumer credit scores higher when there are credit disputes
- Once the credit dispute is retracted, the consumer credit scores normally drop
- Borrowers with a lot of credit disputes may keep those disputes and not retract them if the file is downgraded to a manual underwrite
A large percentage of our borrowers at Gustan Cho Associates are manual underwriting borrowers.
Qualifying For A Mortgage With A Direct Lender With No Lender Overlays
Gustan Cho Associates are experts in manual underwriting. To qualify for FHA loans with bad credit and outstanding collections and/or charged-off accounts, please contact us at 262-716-8151 or text us for faster response. Or email us at email@example.com. The team at Gustan Cho Associates is available 7 days a week, evenings, weekends, and holidays. We are one of the very few national lenders with no overlays on government and conventional loans.