VA Guidelines On Charge Offs And Collections On VA Home Loans

This Article Is About Updated VA Guidelines On Charge Offs And Collections

Per VA Guidelines On Charge Offs And Collections, Veteran Borrowers can qualify for VA Home Loans with outstanding Charge Offs And Collections Accounts.  This holds true if the borrower can get an approve/eligible per automated underwriting system (AUS).

  • VA Guidelines On Charge Offs And Collections state that Veteran Home Buyers do not have to pay outstanding delinquent collection accounts or charged-off accounts
  • Not all VA Lenders have the same VA Lending Requirements
  • Most VA Lenders will have VA Lender Overlays
  • Overlays are mortgage requirements that are above and beyond of minimum VA Guidelines issued by the U.S. Department Of Veteran Affairs
  • Gustan Cho Associates are lenders licensed in multiple states with no mortgage overlays on VA Loans

In this article, we will cover and discuss VA Guidelines On Charge Offs And Collections On VA Home Loans.

VA Lender Overlays

VA Guidelines On Charge Offs And Collections

Not every VA Lender has the same VA Guidelines on VA Loans. Over 75% of our borrowers at Gustan Cho Associates are folks who could not qualify at other mortgage lenders mainly due to their lender overlays. Just because a veteran borrower cannot qualify with one Lender does not mean that they cannot qualify at another lender:

Here are typical lender overlays on VA Home Loans.

Most lenders have VA Lender Overlays on credit scores:

  • Most lenders require a 620 credit score
  • VA does not require a minimum credit score requirement
  • However, it is highly recommended that veteran borrowers have at least a 580 credit score to get an approve/eligible per Automated Underwriting System Findings
  • Gustan Cho Associates does not have any overlays and does not have a minimum credit score requirement

Most Lenders has a debt to income ratio cap of 41% to 50% DTI:

  • VA does not have a cap on debt to income ratio
  • Gustan Cho Associates does not require a maximum debt to income ratio requirement on VA Home Loans

We just go off AUS FINDINGS.

VA Agency Guidelines Versus Lender Overlays

VA Guidelines On Charge Offs And Collections

  • Most VA Lenders may require veteran borrowers to pay off outstanding collections and/or charged-off accounts
  • Per VA Guidelines On Charge Offs And Collections, veteran home buyers can qualify for VA Loans without paying outstanding charge offs and collections if AUS does not require it

VA loans have lenient agency mortgage guidelines when it comes to getting an approve/eligible per automated underwriting system (AUS).

How Does The Collections And Charge Off Process Work

Folks who have lost their job or are experiencing financial difficulties, they probably cannot pay minimum debt payments.

  • If the financial situation does not improve in the short term, the chances are that creditors will be contacting them via telephone and/or mail demanding that they catch up
  • This will most likely continue for the next few months

If the creditor does not get a payment from consumers in four to six months, the creditor will deem debt as not collectible and several things may happen:

  • Charge Off the debt as bad debt
  • After charging it off, they may sell the debt to a third-party collection agency
  • They may pursue legal proceedings and try to sue the consumer 

Charge Offs And Collections And Credit Report

First, they will most likely already have reported consumer to the three credit reporting agencies:

  • Transunion
  • Experian
  • Equifax

VA Guidelines On Charge Offs And Collections & How It Affects Credit

Recent collections and/or charged-off accounts that hit consumer credit report will negatively affect credit scores. When consumers cannot pay their monthly debt, creditors will try to contact them and try to collect on their debt. If the consumer cannot make their payments due to no income, collection proceedings will start:

  • The next move creditor most likely will make is hire a third-party collection agency
  • Creditors can sell consumer debts for pennies on the dollar or work out an agreement with the collection agency where they get a percentage of the bad debt they collect
  • Collection agencies are ruthless and extremely aggressive
  • Collection agencies will do everything in their power to try to collect on the bad debt
  • Collection of bad debt is the only way they get paid
  • If they don’t collect, they do not get paid
  • There are federal rules and regulations that regulate collection agencies on how they can go about collecting debts
  • Unfortunately, many collection agencies do not abide by those rules
  • Many times, collection agencies try to use scare tactics in the collection procedure
  • If collection efforts are not successful, a creditor will write the debt off their books and charge off debt obligations
  • Derogatory bad debt will be reported as a charge off on credit report

Just because a debt is charged off does not mean that creditors will not come after consumers. There are many times where third party collection agencies will purchase charged-off debts and try to collect on that debt.

Collection Accounts With Credit Balances And Debt To Income Ratios

Borrowers can have charged-off accounts and they can qualify for VA Loans under VA Guidelines On Charge Offs And Collections. However, collection accounts are different.

  • Collection accounts on the credit report, if the outstanding balance of the total non-medical collections is greater than $2,000, lenders need to take 5% of the outstanding balance and use it as a monthly debt
  • For example, for borrowers who have a collection account with a $10,000 balance, the mortgage lender will not require to pay that off
  • However, the underwriters will use 5% of the $10,000, or $500 dollars per month as a hypothetical monthly debt
  • This monthly debt of $500 will be applied towards monthly payment obligations which will increase debt to income ratios

The reason being is that open collection accounts can potentially turn into judgments in the future.

More On Charge Offs Accounts

Once a creditor charges off debt, that does not mean that they gave up on collecting on debt:

  • This does not clear consumers from the past debt obligations until the statute of limitations expires on debt
  • The creditor normally sells charge offs to third party debt collectors for pennies on the dollar

These debt collectors now own the paper and the collection process repeats itself.

Qualifying For VA Home Loans With Outstanding Collections And Charge Offs

Qualifying For VA Home Loans With Outstanding Collections And Charge Offs

Veteran Borrowers can still qualify for VA Loans with charge offs and collections:

  • Borrowers do not have to pay off open collection accounts
  • Need to work with a lender that has no overlays on VA Home Loans
  • It is not a VA, FHA, or Fannie Mae guideline that borrowers need to have collection accounts paid off
  • Many lenders do have their own mortgage lender overlays where they require collection account to be paid off
  • If this is the case, borrowers have other options
  • Gustan Cho Associates Mortgage Group has ZERO OVERLAYS on government and conventional loans

Veteran Borrowers looking to qualify for VA Loan with a mortgage company licensed in multiple states with no lender overlays on government and conventional loans, please contact us at Gustan Cho Associates at 262-716-8151 or text us for a faster response. Or email us at gcho@gustancho.com. The team at GCA Mortgage Group is available 7 days a week, evenings, weekends, and holidays.

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