Home Loan With Unpaid Collection Accounts

Home Loan With Unpaid Collection Accounts Mortgage Options

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss qualifying for home loan with unpaid collection accounts mortgage options. There are various home loan with unpaid collection accounts mortgage options. FHA, VA, USDA, Non-QM, and conventional loans all do not require outstanding collections to be paid. Many people get surprised when they hear that you can qualify for a conventional home loan with unpaid collection accounts. Yes, Fannie Mae Guidelines state collection accounts do not have to be paid on primary owner occupant conventional loans. In the following paragraphs, we will explain the various mortgage options in qualifying for a home loan with unpaid collection accounts.

Do You Have To Pay Off Collections To Get A Mortgage?
Pay Off Collections

Can Paying Off Collections Drop Credit Scores?

Most people do not realize that paying off an old collection account will drop their credit scores. Paying off old collection accounts can drop one’s credit scores. Paying off one collection account can plummet one’s credit scores by 40 points or more. This is because it re-activates the date of the last activity on the credit report. Paying off more than one collection account can easily drop credit scores. There are cases where it dropped scores by 100 points.

Old Unpaid Collections Have Little Effect on Credit Scores

Old Unpaid Collections Have Little Effect on Credit Scores

Older unpaid collection accounts have very little or no impact on credit scores. Collection accounts that are 2 years old or older will not impact credit scores. Consumers who have old unpaid collection accounts and charge-offs, leave them alone. HUD does not require paying off outstanding collections and/or charge-off accounts to qualify for FHA loans. Do not pay off outstanding collections and charge-offs or do not do any credit disputes until consulting with a loan officer. The loan officer will advise on what actions to take.

Best Mortgage Lenders For Borrowers With Collections

There are lenders who do require that unpaid collection accounts be paid prior to or at the time of closing. However, there are many mortgage lenders that will not care whether unpaid collection accounts are satisfied or not, especially if they are older. In the event, that the mortgage lender requires that unpaid collection accounts be paid, do not pay them. Paying older outstanding collections and/or charge-off accounts will reactivate the delinquent account and credit scores can drop.

Do Lenders Have Different Requirements for Collections?

Not all mortgage lenders have the same requirements for home loan with unpaid collection accounts. Even though HUD, VA, USDA, Fannie Mae, and Freddie Mac do not require unsatisfied collection accounts to be paid, the individual lender can require collections to be paid as part of their lender overlays. Lender overlays are additional guidelines above the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mac.

What If My Lender Requires Me To Pay Unsatisfied Collections?

If your lender requires you to pay unsatisfied collections, you have two choices. The first choice is to move your loan to a different lender who has no lender overlays on a home loan with unpaid collection accounts. The second option is if you are too deep into the mortgage process and need to meet the closing date on the real estate purchase contract, you can pay the unsatisfied collection account. We will discuss more on how to pay unsatisfied collections in the next paragraph.

What Do I Do When My Lender Requires Me To Pay Unsatisfied Collections?

In the event, that the lender requires that unpaid collection accounts be satisfied, they can be paid at closing. Most of my mortgage loan clients who have unpaid collection accounts get mortgage approvals without needing to pay unpaid collection accounts. When a lender requires mortgage applicants to pay off outstanding collections and/or charge-offs, it is not HUD’S Guidelines. The reason these lenders require to pay outstanding collections and charge-offs is due to their lender overlays. Borrowers who do not want to pay off outstanding collections and/or charge off accounts can qualify for FHA loans with other lenders who do not have lender overlays.

Mortgage Guidelines on Medical Versus Non-Medical Collections

Mortgage Guidelines on Medical Versus Non-Medical Collections

New FHA Guidelines are now in effect with regard to unpaid collection accounts. There are two categories of collection accounts under the eyes of the Federal Housing Administration.

  1. Medical Collection Accounts
  2. Non-Medical Collection Accounts

Medical Collection accounts are exempt with regards to unpaid medical accounts and are exempt from debt to income ratio calculations on outstanding balances. With Non-Medical unpaid collection accounts, HUD will only allow up to an aggregate unpaid amount of $1,000. Unpaid collection accounts of more than $1,000. HUD requires that 5% of the unpaid collection accounts balance be counted towards the mortgage loan borrower’s debt to income calculations. Borrowers do not have to pay the 5% of the unpaid collection accounts balance. But the 5% of the unpaid collection accounts balance will be used as a monthly debt payment in the calculations of debt to income ratios.

Related> FHA Guidelines On Unpaid Collection Accounts

Related> New FHA Guidelines On Unpaid Collection Accounts


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3 Comments

  1. Question about this statement. “Borrowers who do not want to pay off outstanding collections and/or charge off accounts can qualify for FHA Loans with other lenders who do not have lender overlays””. How do you find another lender that will without another hard pull to your credit thus lowering your score.

  2. Looking to possibly purchase a condotel in Daytona Beach area. We plan on renting it out when we are not using it.

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