In this blog, we will cover and discuss qualifying for mortgage with collection accounts guidelines. Homebuyers can qualify for a mortgage with collection accounts. HUD, the parent of FHA, has the most lenient agency mortgage guidelines than any other loan program. It is easier to get an approve/eligible per automated underwriting system (AUS) on FHA loans than in any other mortgage loan program. Lenders can require unpaid collections and charged-off accounts to be paid off even though HUD does not require it. This is because lenders can have lender overlays on FHA loans. Lender overlays are additional mortgage guidelines that are above and beyond the minimum agency guidelines. Qualifying for mortgage with collection accounts is allowed per agency guidelines but lenders may require them paid.  In the following paragraphs, we will detail qualifying for mortgage with collection accounts and getting approved.

Qualifying For Mortgage With Collection Accounts HUD Guidelines on FHA Loans

HUD, the parent of FHA, allows qualifying for mortgage with 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 qualifying for mortgage with 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.

Agency Guidelines on Qualifying For Mortgage With Collection Accounts Versus Overlays by Lenders

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 on Non-Medical Collection Accounts

Qualifying for mortgage with collection accounts with medical collections is often ignored by lenders with no overlays. Non-Medical Collection Accounts are any collection accounts that are not medically 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 loan.

Qualifying for Mortgage With Collection Accounts Guidelines on Non-Medical Collections

HUD Guidelines require 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 the 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
• than 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.

Qualifying for Mortgage With Collection Accounts With Large Outstanding 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 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.

Qualifying For Mortgage With Collection Accounts Solutions With High DTI 

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. In 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

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 charged-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.

Getting Loan Denial Qualifying For Mortgage With Collection Accounts Due To Overlays By Lender

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.

Qualifying For Mortgage With Collection Accounts Guidelines on Mortgage Charge Offs

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.

Getting Approved For a Mortgage With Outstanding Collections

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 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. Gustan Cho Associates is a mortgage company licensed in multiple states with no overlays on government and/or conforming loans. Gustan Cho Associates has a national reputation for being a one-stop mortgage shop because we offer dozens of non-QM and alternative financing loan programs. Some of our most popular non-QM loan programs are bank statement mortgages, mortgages one day out of bankruptcy and foreclosure, and dozens of other non-QM mortgage programs.