Past Due Versus Collection And Charge Off Accounts Mortgage Guidelines
This BLOG On Past Due Versus Collection And Charge Off Accounts Mortgage Guidelines Was UPDATED And PUBLISHED On December 23rd, 2019
FHA Loans are the most popular mortgage loan programs today for first time home buyers:
FHA Home Loans are also the best loan program for home buyers with the following credit and income profile:
- have less than perfect credit
- lower credit scores
- prior bankruptcy
- prior foreclosure
- tax liens
- unpaid collection accounts
- charge off accounts
- late payments
- past due debts
FHA Loans are not just for consumers with bad credit. They are beneficial to consumers who have great credit but have a higher debt to income ratios. HUD, the parent of FHA, allows non-occupant co-borrowers to qualify for a home loan. Conventional Loan Programs have a maximum debt to income ratio cap set at 50%. HUD caps the debt to income ratios at 56.9% back end and 46.9% front end to get an approve/eligible per automated underwriting system findings. All loan programs, including FHA, have mortgage guidelines on past due versus collection and charge off accounts.
Past Due Versus Collection And Charge Off Accounts Basic Guidelines
The Federal Housing Administration has very lenient lending guidelines with regards to past due versus collection and charge off accounts than any other loan programs:
- However, mortgage guidelines on past due versus collection and charge off accounts are different for single-family homes, two to four-unit properties, and investment properties
- For all FHA Loans, the minimum credit score required to qualify for a 3.5% down payment FHA Loan is 580
With regards to past due versus collection and charge off accounts with borrowers buying a single-family home or any one unit property such as a condominium or town home is that all past due accounts need to be brought current. Past due accounts are different than collection accounts.
Mortgage Guidelines On Collection Accounts
With regard to collection accounts, borrowers are not required to pay any outstanding collection accounts or non-mortgage related charge off accounts. This holds true regardless of how much the amount the outstanding collection balance and/or charge off account is.
- Collection accounts are classified as non-medical collections and medical collection accounts
- Medical collection accounts are exempt from credit disputes
- Medical collections are exempt from debt to income calculations on outstanding collection balances
- However, if the borrower has a total outstanding collection balance of greater than $2,000 from the combination of all non-medical collection accounts, then 5% of the outstanding collection balance will be used to calculate borrower’s debt to income ratios
This holds true even though the borrower does not have to pay anything and this payment is a hypothetical debt.
How Large Outstanding Collections Impact Debt To Income Ratios
Consumers with substantial large balances can enter a written payment agreement with the collection agency and/or creditor for a monthly payment agreement:
- That monthly payment agreement will be used to calculate the debt to income ratios in lieu of the 5% of the outstanding collection account balance
- For example, here is a case study:
- if the consumer has an outstanding collection balance of $10,000
- 5% of the $10,000 outstanding collection balance, or $500, will disqualify borrower due to high debt to income ratios
- then the borrower can enter into a written payment agreement with the collection agency or creditor for a lesser amount
- that lesser amount will be used as the monthly payment in calculating the borrower’s debt to income ratios and not the $500
Credit Disputes Will Halt Mortgage Process
Credit disputes can be deal killers and have an extremely negative impact with any type of loan program.
- Cannot have credit disputes on any non-medical collection accounts with outstanding balances of greater than $1,000 (combination of all non-medical collection accounts on credit report )
- Charge off accounts do not matter no matter what the outstanding charge off amount is
- However, cannot have any credit disputes on charge off accounts
- Before consumers can proceed with the mortgage process, all non-medical collection account and charge off credit disputes needs to be removed
- The credit report needs to reflect that
- Unfortunately, when consumers retract credit disputes off credit report, that will lower credit scores
- Most often credit scores can drop significantly
- There are instances where borrowers can no longer meet the minimum credit score requirements
- Can have credit disputes with non-medical collection accounts that have zero balances on them
- Medical collection accounts does not count
- Can have credit disputes with medical collection accounts
Conforming Mortgage Guidelines On Collection Accounts On 2 To 4 Unit Properties And Second Homes
Fannie Mae Guidelines on collection accounts on 2 to 4 Unit Properties and Second Home Purchases are different than those of single-family homes or one-unit homes such as condominiums and town homes.
- For two to four-unit owner occupant properties and for second home properties here are the mortgage guidelines:
- Fannie Mae Guidelines on collections and charge off accounts which total more than $5,000 need to be paid off prior to closing or at closing
Past Due Versus Collection And Charge Off Accounts On Investment Properties
Fannie Mae mortgage guidelines with regards to collection accounts and charge off accounts on investment properties are much stricter than single-family homes and two to four-unit properties.
- Any collection accounts and/or non mortgage charge off accounts that is equal and/or greater than $250.00 needs to be paid off prior to or at closing