Qualifying For Mortgage With Collection Accounts And Charge Offs

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This ARTICLE On FHA Guidelines In Qualifying For Mortgage With Collection Accounts Was PUBLISHED On August 22nd, 2019

Qualifying For Mortgage With Collection Accounts
Gustan Cho Associates

Qualifying for mortgage with collection accounts with FHA Loans can be done with lenders who have no lender overlays with outstanding collection accounts.

  • HUD does not require borrowers to pay off outstanding collection accounts in order to be eligible to qualify for an FHA insured loan
  • However, most banks and many lenders will have overlays on collection accounts
  • Lenders with overlays on collections will not approve any borrowers who have outstanding collection accounts and judgments even though the Federal Housing Administration does not require it

In this article, we will cover and discuss the Qualifying For Mortgage With Collection Accounts And Charge Offs.

What Are Lender Overlays

What Are Lender Overlays

It is not illegal for banks and lenders to have higher mortgage lending standards and requirements that surpass the minimum FHA lending requirements. HUD, the parent of 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 Guidelines On Non-Medical Collection Accounts

What are Qualifying For Mortgage With Collection Accounts Guidelines On Non-Medical Collection Accounts

Non-Medical Collection Accounts are any collection accounts that are not medical related such as outstanding collection accounts on credit card debts, auto repossession, utilities, cell phone carriers, and other creditors.

  • Borrowers do not have to pay off outstanding non-medical collection accounts to qualify for an FHA Loans

However, HUD Guidelines requires lenders to take outstanding collection account balances of aggregate balances of $2,000 or greater to be included in calculating 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
  • this holds true even though the borrower does not have to pay for it when 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

This is the case even though they do not have to pay anything.

Issues With Larger Outstanding Collection Account Balances

what is the Issues With Larger Outstanding Collection Account Balances

This creates a big problem for borrowers 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 borrowers from qualifying for an FHA loan due to high debt to income ratios.

Solutions To Solve High DTI Due To Large Outstanding Collection Balances

What are 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:

  • 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 is no payment history seasoning requirement
  • The day the borrower enters into a payment agreement with the creditor and/or collection agency, the lender will use the monthly agreed payment

On the above example, if consumers 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 With Medical Collections And Charge Offs

How Qualifying For Mortgage With Collection Accounts With 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 an FHA Loan

This is for both first mortgage charge off accounts and second mortgage charge off accounts.

Borrowers Qualifying For Mortgage With Collection Accounts But Do Not Qualify Due To Overlays 

Who are Borrowers Qualifying For Mortgage With Collection Accounts But Do Not Qualify Due To Overlays 

Many borrowers go to their local banks or other lender and are told that they do not qualify for an FHA Loan due to outstanding collection accounts and charge off accounts.

  • A large percentage of our borrowers are folks who were told they do not qualify at other lenders due to their outstanding collection accounts and charge off accounts
  • Many borrowers are told that they do not qualify for an FHA Loan with a mortgage charge off
  • The only way to qualify for an 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
  • Many do not know how to read credit reports
  • One thing is that all charge off accounts reporting on credit reports have an 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 lenders that want older collection account balances paid off are banks and lenders with mortgage lender overlays

Borrowers told they do not qualify with outstanding collection accounts and charge off accounts by a mortgage lender, please contact us at Gustan Cho Associates at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com. Gustan Cho Associates are direct lenders with no overlays on government and/or conforming loans.

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