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Mortgage With Judgment And Collections Guidelines On Home Loans

Gustan Cho Associates
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Mortgage With Judgment And Collections Guidelines On Home Loans

This BLOG On Mortgage With Judgment And Collections Guidelines On Home Loans Was UPDATED On June 10th, 2019

Mortgage With Judgment And Collections
Gustan Cho Associates

Qualifying For Mortgage With Judgment And Collections:

Home buyers seeking a home loan with bad credit can qualify for a mortgage with judgment and collections. Every lender can have their own lender overlays when it comes to mortgage with judgments and collection accounts:

  • However, not all lenders will approve a home buyer for a mortgage with judgement and collections due to their lender overlays
  • Lenders with no lender overlays, such as myself, will just go off the minimum federal lending guidelines with regards to judgment and collections
  • Both U.S. Department of Urban Development (HUD),The parent of the Federal Housing Administration, and Fannie Mae and Freddie Mac have their own lending guidelines for mortgage with judgment and collections

FHA Guidelines For Mortgage With Judgment And Collections

FHA Guidelines For Mortgage With Judgment And Collections
Gustan Cho Associates

FHA guidelines for mortgage with judgment and collections is very lenient compared to other mortgage loan programs:

  • In this blog, we will be discussing FHA Guidelines for mortgage with judgment and collections
  • We will guide home buyers on how they can qualify for mortgage with judgment and collections, charged off accounts, and other derogatory credit

FHA Guidelines On Collection Accounts

FHA Guidelines On Collection Accounts
Gustan Cho Associates

FHA categorizes collection accounts into two separate categories.

  • Non-medical collection accounts and medical collection accounts
  • FHA does not require that unpaid collection accounts to be paid in order to get a FHA loan approval
  • With non-medical collections greater than $1,000 ( total of all unpaid collection accounts ), then 5% of the unpaid balance of the collection account will be calculated in debt to income
  • For example, lets take a case scenario:
    • If a borrower has unpaid collection accounts totaling $5,000
    • Then 5% of the $5,000 or $250 will be used as a monthly occurring debt
    • This will be used by the mortgage underwriter to calculate the borrower’s debt to income ratio
    • This will be a hypothetical monthly payment and borrower is not obligated to pay anything
  • Any unpaid collection accounts under $1,000 are exempt
  • They are not counted towards the hypothetical debt to income ratio calculations

FHA Loans And Medical Collections

FHA Loans And Medical Collections
Gustan Cho Associates

FHA treats medical collection accounts differently than non-medical collection accounts.

  • Unpaid medical collection accounts are exempt from the debt to income ratio calculations
  • It is exempt on unpaid collection account balances no matter how much the outstanding unpaid collection balance is
  • There is no 5% deduction from the unpaid outstanding medical collection account balance

FHA Guidelines On Judgments

FHA Guidelines On Judgments
Gustan Cho Associates

Judgments are probably the worst derogatory item you can have on credit report.

  • Judgments are collection accounts that the court has ordered in favor of the judgment creditor
  • It gives the judgment creditor the power to pursue collection actions such as wage garnishments, levy of assets from bank accounts and investment accounts
  • The good news is that home buyers can qualify for a FHA loan with judgments
  • They can qualify as long as they have a written payment agreement with the judgment creditor
  • There is a three month seasoning requirement where they need to have made at least three payments
  • Three months of canceled checks and/or bank statements needs to be provided to underwriter

What Happens If I Default On My Payment Agreement With The Judgment Creditor After I Close On My Home Loan?

What Happens If I Default On My Payment Agreement With The Judgment Creditor After I Close On My Home Loan?
Gustan Cho Associates

Whatever happens after closing does not matter. Lenders will not enforce it.

  • Borrowers entering into a written payment agreement with a judgment creditor can qualify for FHA Loan after making three consecutive timely payments
  • After closing on home loan if the borrower defaults on the written payment agreement with the judgment creditor, that is between consumer and the judgment creditor
  • Bottom line is if the borrower enters into a written payment agreement with a judgment creditor and keep that payment current until they close on the mortgage
  • If borrowers do not make any more payments after they close, that is perfectly fine
  • Lenders only care about getting paid on their mortgage payment and hope borrowers will not be in default of the terms of their mortgage note

For more information on this topic or other related topics, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@loancabin.com. 

Related> Can I qualify for a home loan with a judgment?

Related> Can I get mortgage with unpaid collection accounts?

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