FHA Loans are the most popular mortgage loan programs today for first time home buyers or home buyers who have less than perfect credit, lower credit scores, prior bankruptcy, prior foreclosure, judgments, tax liens, unpaid collection accounts, charge off accounts, or past due debts. FHA Loans are not just for mortgage loan borrowers with bad credit. FHA Loans are beneficial to mortgage loan borrowers who have great credit but have higher debt to income ratios or mortgage loan borrowers who need non-occupant co-borrowers to qualify for a home loan. Conventional Loan Programs have a maximum debt to income ratio cap set at 45% where FHA caps the debt to income ratios at 56.9%. All mortgage loan programs, including FHA, have mortgage guidelines on past due versus collection and charge off accounts.
Past Due Versus Collection And Charge Off Accounts
The Federal Housing Administration has very lenient FHA mortgage lending guidelines with regards to past due versus collection and charge off accounts than any other mortgage loan programs. However, FHA 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 FICO. With regards to past due versus collection and charge off accounts with mortgage loan borrowers buying a single family home or any one unit property such as a condominium or townhome is that all past due accounts need to be brought current. Past due accounts are different than collection accounts. With regard to collection accounts, mortgage loan borrowers are not required to pay any outstanding collection accounts or non-mortgage related charge off accounts regardless on 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 as well as from debt to income calculations on outstanding collection balances. However, if the mortgage loan 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 the mortgage loan borrower’s debt to income ratios even though the borrower does not have to pay anything. For those mortgage loan borrowers with substantial large balances, then the mortgage loan borrower can enter a written payment agreement with the collection agency and/or creditor for a monthly payment agreement and 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, if the mortgage loan borrower has an outstanding collection balance of $10,000 and the 5% of the $10,000 outstanding collection balance, or $500, will disqualify the mortgage loan borrower due to high debt to income ratios, then the mortgage loan borrower can enter into a written payment agreement with the collection agency or creditor for a lesser amount and 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 can be deal killers and have an extremely negative impact with FHA Loans. You 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 your credit report ). Charge off accounts do not matter no matter what the outstanding charge off amount is, however, you cannot have any credit disputes on charge off accounts. Before you can proceed with the mortgage loan process , all non-medical collection account and charge off credit disputes needs to be removed and the credit report needs to reflect that. Unfortunately, when you retract credit disputes off your credit report, that will lower your credit scores and sometimes your credit scores can drop significantly where you no longer can meet the minimum credit score requirements. You can have credit disputes with non-medical collection accounts that have zero balances on them. Medical collection accounts does not count and you can have credit disputes with medical collection accounts.
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 townhomes. For two to four unit owner occupant properties and for second home properties, Fannie Mae Guidelines on collections and charge off accounts which totals more than $5,000 need to be paid off prior to closing or at closing.
Collection Accounts On Investment Properties
Fannie Mae mortgage lending guidelines with regards of collection accounts and charge off accounts on investment properties are much more 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.