Advice In Qualifying For Mortgage With Collection Accounts And Charge Offs

FHA Guidelines In Qualifying For Mortgage With Collection Accounts

Qualifying for mortgage with collection accounts with FHA Loans can be done with FHA mortgage lenders who have no lender overlays with outstanding collection accounts. FHA does not require FHA mortgage loan borrowers to pay off outstanding collection accounts in order to be eligible to qualify for a FHA insured loan. However, most banks and many mortgage lenders will have mortgage lender overlays on collection accounts that they will not approve any mortgage loan borrowers who have outstanding collection accounts and judgments even though the Federal Housing Administration does not require it. It is not illegal for banks and mortgage lenders to have higher mortgage lending standards and requirements that surpass the minimum FHA lending requirements. FHA classifies collection accounts into three categories:

  1. Non-Medical Collection Accounts
  2. Medical Collection Accounts
  3. Charge Off Accounts

Qualifying For Mortgage With Collection Accounts: Non-Medical Collection Accounts

Non-Medical Collection Accounts are any collection accounts that is not medical related such as outstanding collection accounts on credit card debts, auto repossession, utilities, cell phone carriers, and other creditors. You do not have to pay off outstanding non-medical collection accounts to qualify for a FHA Loan, however, FHA requires that FHA approved mortgage lenders take outstanding collection account balances of aggregate balances of $2,000 or greater to be included in calculating the mortgage loan borrower’s debt to income ratios. 5% of the outstanding collection account balance on non-medical collection accounts needs to be figured in as part of the borrower’s monthly debt, even though the borrower does not have to pay for it, in calculating the mortgage loan borrower’s debt to income ratio. For example, if the borrower has a total of $20,000 of outstanding collection account balance from all of his or her delinquent collection accounts, then 5% or $20,000 or $1,000 will need to be used as part of their monthly debt payments even though they do not have to pay anything. This creates a big problem for FHA mortgage loan borrower’s with large outstanding collection accounts. If someone makes $52,000 per year, which is $4,000 per month gross, taking that 5% of the $20,000 outstanding collection account balance, or $1,000, is a large chunk of change to use it as monthly debt calculations ( 25% of total monthly gross income ). Many times, large outstanding collection accounts will disqualify the FHA mortgage loan borrower from qualifying for a FHA Loan due to high debt to income ratios.

Solutions To Solve High DTI Due To Large Outstanding Collection Balances

Home Buyers who have had prior bad credit and have larger outstanding collection account balances can enter into a written payment agreement with the collection agency and/or creditor and that written payment agreement can be used in the calculation of the debt to income ratios in lieu of the 5% of the outstanding collection account balance. The good thing about this is that there are no payment history seasoning requirement and the day the borrower enters into a payment agreement with the creditor and/or collection agency, the mortgage lender will use the monthly agreed payment. On the above example, if the mortgage loan borrower were to enter into a $200 per month payment agreement on the $20,000 outstanding collection account balance, the $200 will be used in calculating the debt to income ratios instead of the 5% of the $20,000 or $1,000.

Qualifying For Mortgage With Collection Accounts: Medical Collections And Charge Offs

Medical Collection accounts and charge off accounts are exempt from debt to income ratio calculations unlike non-medical collection accounts. No matter how much the outstanding collection account balance is on the medical collection account balance and/or charge off accounts, under the eyes of FHA, these can be exempt from debt to income ratio calculations.

There are additional FHA Guidelines On Mortgage Charge Off Accounts. Mortgage charge off accounts will show a balance as will other charge off accounts. All charge off accounts will show a balance owed on the consumer’s credit report. Although charge off accounts are totally ignored with FHA Loans, mortgage charge offs are different. There is a three year waiting period after a mortgage charge off account to qualify for a FHA Loan. This is for both first mortgage charge off accounts and second mortgage charge off accounts.

Are You Told That You Do Not Qualify For FHA Loan Due To Collections And Charge Off Accounts?

Many mortgage loan borrowers go to their local banks or other mortgage lender and are told that they do not qualify for a FHA Loan due to outstanding collection accounts and charge off accounts. A large percentage of my mortgage loan borrowers are borrowers who were told they do not qualify at other mortgage lenders due to their outstanding collection accounts and charge off accounts. Many borrowers are told that they do not qualify for a FHA Loan with a mortgage charge off and the only way to qualify for a FHA Loan with a mortgage charge off is to pay off the mortgage charge off account. Unfortunately, many mortgage loan originators do not know what they are talking about and do not know how to read credit reports. One thing is that all charge off accounts reporting on credit reports have a outstanding collection balance. That outstanding collection balance is the amount that is charged off. Most times a creditor cannot accept a charge off balance payoff since the debt was written off. Many mortgage lenders that want older collection account balances paid off are banks and mortgage lenders with mortgage lender overlays. If you are told that you do not qualify with outstanding collection accounts and charge off accounts by a mortgage lender, please contact me at 262-716-8151 or email me at gcho@gustancho.com. I will be able to help you.

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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