VA Collections Mortgage Guidelines On VA Home Loans

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VA Collections Mortgage Guidelines On VA Home Loans

This ARTICLE On VA Collections Mortgage Guidelines On VA Home Loans Was PUBLISHED On July 17th, 2019

VA Collections Mortgage Guidelines On VA Home Loans

The Department of Veterans Affairs has recently updated the VA Collections Mortgage Guidelines On VA Home Loans:

  • Gustan Cho Associates Mortgage Group specialize in VA mortgages
  • VA guidelines are constantly changing
  • In this short blog, we will update you on VA collection guidelines
  • Back on May 26, 2019, HUD introduced a new guideline surrounding non-medical collections reporting to your credit report
  • In this article, we will detail the old rule versus the new rule
  • We will discuss how this affects thousands of veterans across the nation when it comes to buying a home

In this article, we will cover and discuss the recent changes in the VA Collections Mortgage Guidelines On VA Home Loans.

VA Collections Mortgage Guidelines Versus Lender Overlays

VA Collections Mortgage Guidelines Versus Lender Overlays

Collection accounts and VA mortgages

  • Collections are simply past due accounts that are now in a collection status on your credit report
  • Collections do impact your credit score in a negative way
  • The more collections you have, the harder it will be for your credit score to recover
  • The VA does not necessarily require the veteran to pay off collections to enter into a mortgage
  • However, there must be an amount factored into your debt to income ratio

Old VA Collections Mortgage Guidelines

Old VA Collections Mortgage Guidelines

The old rule

  • For all non-medical collection accounts reporting on a veteran’s credit report, you used to take 5% of the amount owed as a monthly payment against your overall debt to income ratio
  • For example, if you have a collection from past due credit card for $2,350, you used to use a payment of XX against your debt to income ratio
  • This was often referred to as the 5% rule (this 5% rule is still in place for FHA mortgages)

New UPDATED VA Collections Mortgage Guidelines On VA Home Loans

New UPDATED VA Collections Mortgage Guidelines On VA Home Loans

The new VA collection guideline

  • As of May 26, 2019, the HUD guideline has changed on VA mortgages in regard to how collections are viewed for debt to income purposes
  • The mortgage company now must verify if there is a minimum payment associated with a non-medical collection account
  • A credit supplement must be completed by the lender to verify if any payment is due or if any repayment plan is put in place
  • Assuming that there is an amount due as a monthly payment, then it must be factored into your overall debt to income ratio

This can have an adverse effect on your overall mortgage qualifications.

Monthly Payment On Outstanding Collections

Monthly Payment On Outstanding Collections

If there is a payment associated with the collection account, this can decrease your purchasing power of buying your home with a VA loan.

  • It is unclear what sparked this change in the guideline
  • A credit supplement will be completed by the mortgage company
  • If this credit supplement reveals a payment, that payment will be factored into your debt to income ratio
  • This could have an adverse effect if that minimum payment due is larger than 5% of the collection amount
  • This will then decrease your purchasing power
  • This is because you will qualify for a lower overall monthly payment. On the flip side, this can also help some veterans
  • If the credit supplement supports a $0 payment, the 5% of the amount due will not be back turned into your debt to income ratio
  • A $0 payment will increase your buying power
  • It is now more important than ever to be 100% open and honest with your loan officer
  • The loan officer will not know in the beginning stages if there is a payment associated with your collection accounts
  • This can affect you once you are under contract

If there is any sort of repayment plan put in place, you must tell your loan officer out front so that amount is factored into your pre-approval.

  • There is no rhyme or reason for how collections report to your credit report
  • Many collection agencies are small businesses who purchased bad debt and attempt to collect those funds
  • The small companies report to credit bureaus in funky ways
  • Sometimes you will see an amount due and payment lining up the same
  • Borrowers with more than likely will not have $1000 a month monthly payment, but the credit report can reflect a $1,000 monthly payment

The credit supplement will get the mortgage underwriter clarification on how much is actually done if any amount due.

Qualifying For VA Home Loans With A Direct Lender With No Overlays

Qualifying For VA Home Loans With A Direct Lender With No Overlays

Small changes like this can seriously impact a veteran’s qualifications. Little changes like this happen all the time in the mortgage industry. It is important to find a lender such as Loan Cabin who are up-to-date on mortgage guidelines. The Team at Gustan Cho Associates are available 7 days a week, mornings and evenings. We are always here to assist you with mortgage questions. Gustan Cho Associates at Loan Cabin Inc. is a NO LENDER OVERLAYS lender who specializes in lower credit score qualifications. There are very few situations we have not seen before. We look forward to assisting you to buy your dream home!

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