Qualifying For FHA Loans With Past Collections And Late Payments

This BLOG On Qualifying For FHA Loans With Past Collections And Late Payments Was UPDATED On August 28th, 2017

Past collections and late payments does not necessarily disqualify borrowers from qualifying for FHA Loans with a good letter of explanation.

  • As long as borrowers have a history of paying their bills on time for the past 12 months, they are eligible for FHA Loans without paying for outstanding collections and charge offs accounts.
  • However, a streak of late payments due to extenuating circumstances such as unemployment, divorce, death in the family, or medical issues will still qualify borrowers for FHA Loans if they have been timely for the past 12 months. 
  • The mortgage lender will want a detailed letter of explanation.

Qualifying For FHA Loans With Outstanding Collections

Outstanding collections and charge off accounts on credit report do not have to be paid to qualify for FHA Loans. Do not just pay off old outstanding collection and charged off accounts without consulting with a mortgage loan originator.

  • The loan officer will advise borrowers on whether old collection and charged off accounts need to be paid.
  • There are many mortgage lenders that will not approve mortgage loans even with open collection and charged off accounts because they have lender overlays.
  • Lender overlays are higher lending guidelines that a lender may require.
  • Borrowers with outstanding collections and charged off accounts should consult with a lender that has no overlays on collections and charged off accounts.
  • The Gustan Cho Team at USA Mortgage are direct lenders with no lender overlays on FHA Loans.
  • Paying off an old collection can be tricky and can lower credit scores  because it re-activated the date of last activity (DLA).
  • Sometimes paying outstanding collections and charged off accounts can lower scores by more than 80 points and can destroy the chances of qualifying for a mortgage loan. 
  • What happens when paying outstanding old collection account or make partial payment on an old collection account, it will reactivate that collection account and the credit reporting agencies will recognize it as a new recent collection. 

Paying Outstanding Collections & Charged Off Accounts

If the mortgage lender requires to pay off an outstanding collection or charged off account due to their lender overlays here is the way to proceed:

  • First settle the collection amount. 
  • Many collection agencies will settle for fifty cents on the dollar and maybe less.
  • Also, negotiate to only pay off the collection amount due if and only if they will do a pay for delete. 
  • What this means is that the collection agency will get the derogatory collection item removed/deleted from credit report in lieu of satisfying the outstanding collection amount. 
  • If they are not willing to remove the derogatory item, then do not pay the collection until prior to closing or at closing. 
  • Remember that paying a partial collection can lower credit scores drastically and can jeopardize qualifying for mortgage loan.

Qualifying For FHA Loans With Late Payments

Most mortgage lenders do not want their borrowers to have any late payments on their credit report for the past 12 months.

  • Borrowers who have late payments in the past 12 months,  contact the creditor and see if they can get that late payment removed as a one time courtesy. 
  • Consumers who have never been late and do not have a late payment history with a creditor, most creditors will remove a late payment as a one time courtesy. 
  • However, consumers who have a history of late payments, it might prove to be rather difficult in having the creditor remove the late payment. 
  • A late payment in the past 12 months is extremely a red flag under the mortgage loan underwriter’s eyes. 
  • Borrowers will need an excellent detailed letter of explanation on the reason of the late and the circumstances surrounding the late payment. 
  • Excuses like borrower forgot or my husband or wife forgot to pay is not an acceptable excuse and can hurt chances on getting a mortgage loan approval.

One or two late payments in the past 12 months is not a deal killer. As long as the borrower can get an approve/eligible per Automated Underwriting System findings, The Gustan Cho Team at USA Mortgage will do the loan since we do not have any lender overlays with late payments in past 12 months.

FHA Loans With Late Payments After Bankruptcy & Foreclosure

Most mortgage lenders do not want to see their mortgage loan applicants have any late payments after a bankruptcy and/or foreclosure.

  • Most banks will not even look at the mortgage application if they see that the applicant has had collections and late payments after a bankruptcy, short sale, deed in lieu of foreclosure, and/or foreclosure. 
  • For those who have had a history of collections and late payments after a bankruptcy or foreclosure need to get new positive credit to offset the late payment history.
  • Late payments after bankruptcy and/or foreclosure is not a deal killer.
  • As long as borrowers can get an approve/eligible per AUS FINDINGS, The Gustan Cho Team at USA Mortgage can possibly qualify and approve the borrower.

Mortgage Loan Applicants can qualify Past Collections And Late Payments. However, to get an approve/eligible per AUS, borrowers need to be timely in the past 12 months. Borrowers who need to qualify for FHA Loans with past Past Collections And Late Payments with a direct lender, please contact us at 1-800-900-8569 or text us at 262-716-8151 for faster response or email us at gcho@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays.

Related> Unpaid Collection Accounts

Related> Credit History And Recent Late Payments

Related> Qualifying For Mortgage With Unpaid Collections

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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