VA Guidelines on Charge Offs and Collections on VA Home Loans

Gustan Cho Associates are mortgage brokers licensed in 48 states

In this blog, we will cover and discuss VA guidelines on charge-offs and collections on VA loans. 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 Lenders Have The Same Lending Requirements on VA Loans

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 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.

Why Would a VA Loan Get Denied?

Not all lenders have the same VA lending requirements. One lender may deny a borrower but a different lender will approve. There are two different types of VA guidelines each borrower goes through on a VA loan. All mortgage companies require their borrowers to meet the minimum agency VA guidelines. If they do not meet the minimum VA agency guidelines, it means the VA will not insure and guarantee the loan to lenders.

Why Do Some Lenders Have Higher Lending Requirements on VA Loans Than Other Lenders

Most lenders feel the minimum agency guidelines of the Veterans Administration are too lenient so they create their own higher lending requirements called lender overlays. 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. Gustan Cho Associates are mortgage brokers licensed in 48 states with no lender overlays on VA loans.

What Disqualifies You From Using a VA Loan?

VA loans have the most lenient lending requirements than any other loan program. 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.

What Debt-To-Income Ratio For VA Loan?

There is no maximum debt-to-income ratio with an approve/eligible per automated underwriting system (AUS) on VA loans per VA agency guidelines. You can get an approve/eligible per automated underwriting system (AUS) on VA loans with over 60% debt-to-income ratio with strong residual income. However, not all lenders have the same lending requirements on VA loans. Most Lenders have lender overlays on debt-to-income ratio requirements on VA home loans. Most Lenders have a debt-to-income ratio cap of 41% to 50% DTI: VA does not have a cap on the 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 Loans Denied During Underwriting For Bad Credit

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).

Can I Qualify For a VA Loan With Collection Accounts?

Folks who have lost their job or are experiencing financial difficulties 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 the 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 

Can I Qualify For a VA Loan With Charged-Off Accounts?

Charge Offs And Collections And Credit Report

Charged-off accounts do not have to be paid to qualify for VA loans. This holds true no matter how large the charge-off balance is. The 5% rule on taking from the charged off account balance does not apply like it does on collection accounts. First, they will most likely already have reported the consumer to the three credit reporting agencies and make sure the charged off accounts are not judgments. 

  • Transunion
  • Experian
  • Equifax

If the charged off accounts are not disputed and are not judgments, you are all set with qualifying for VA loans with charge-off accounts.

VA Loans With Medical versus Non-Medical Collection Accounts

Medical collections are treated differently than non-medical collection accounts. Medical collections are normally ignored by mortgage underwriters. However, not medical collection accounts can affect your debt-to-income ratios. We will cover more on the 5% rule on the next paragraph on how collection accounts affect DTI on VA loans. Recent collections and/or charged-off accounts that hit consumer credit reports 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 to 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.

How Collection Accounts Affect DTI on VA Loans

VA requires 5% of the outstanding collection account balance needs to be used as hypothetical debts for debt-to-income ratio qualification. You do not have to pay the outstanding collection account. 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.

Do I Have To Pay Charged-Off Accounts To Qualify For a VA Home Loan?

If collection efforts are not successful after 120 days, 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 the credit report. Just because a debt is charged off does not mean that creditors will not come after consumers. There are many times when third-party collection agencies will purchase charged-off debts and try to collect on that debt.

Best Lenders For VA Loans With Collection Accounts 

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.

Best Mortgage Lenders For VA Loans With Bad Credit

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.

Can I Get A VA Loan With Charged-Off and Collection Accounts?

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 accounts 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

Best Mortgage Lenders For VA Loans With Low Credit Scores

In the following paragraphs, we will cover and discuss VA Home Loans with outstanding collections and charge-offs. VA Home Loans With Outstanding Collections are allowed under the U.S. Department Of Veteran Affairs Guidelines. Veteran Home Buyers can qualify for VA Home Loans With Outstanding Collections And Charge Offs without having to pay off the open collections.

Do You Have To Pay Collections To Qualify For VA Loans?

Borrowers with unpaid outstanding collections that have been aged, do not pay them off thinking it will improve credit scores. It is quite the opposite. Open collections that are older than 2 years old on credit report normally has no impact on credit scores. However, making a partial payment or paying the open collections off will renew derogatory information as a current derogatory and it can drop credit scores.

How To Pay Outstanding Collections

Consumers who really need to pay off outstanding collections in the mortgage approval process or the lender is required to pay off open collections, realize that it may drop credit scores. The reason being is that it resets the date of the last activity. Many veteran home buyers hire expensive credit repair companies to delete older collections and charge off accounts that have little to no impact on their credit scores.

Impact on Credit Scores By Paying Old Collection Accounts

I have seen credit scores drop 40 or more points when people paid off open collections. Consumers who are satisfying an old unpaid collection account should contact the creditor. Arrange a pay for delete where the collection agency or creditor is willing to delete the derogatory item off the credit report in lieu of paying outstanding collections. Many collection agencies and creditors will do this while others will not. Basically telling the creditor or collection agency that they will get their money if and only if they will remove derogatory off credit report

Can Lender Deny VA Loans For Unpaid Collection Accounts?

VA Guidelines On Charge Offs And Collections: Overlays On Outstanding Collections

Lenders who have overlays might require to pay off open collections. Not all Lenders have the same VA Lending Guidelines. All Lenders need to meet the minimum VA Mortgage Guidelines set by the Veterans Administration. However, any lender can have higher credit and income requirements than the minimum VA Guidelines. These additional lender requirements are called VA Lender Overlays. Paying off open collections is not a VA, FHA, or Fannie Mae mortgage guideline. VA, FHA, and Conventional Borrowers can qualify for home loans without paying outstanding collections.

Do Lenders Have Different Requirements for VA Loans?

Certain mortgage lenders do want to see open collections paid off. Lenders that want outstanding collections and charged off paid off when AUS is not conditioning it is said to have lender overlays. The reason for this is that open collections can possibly turn into future judgments. Mortgage lenders really frown on judgments. Borrowers who have lenders requiring them to pay off open collections can shop other mortgage lenders that do not have mortgage lender overlays. We are licensed in multiple states with no overlays on VA Home Loans With Outstanding Collections. The only thing we go by is an approve/eligible per automated underwriting system. Automated approval is the final approval

How Do Lenders Treat Collection Accounts During Mortgage Process on VA Loans

Lenders will require that 5% of the balance on open collections be counted towards counting debt to income ratios if the aggregate total open collections balance is greater than $2,000. For example, borrowers who have open collections with a total unpaid balance of $4,000, 5% of the $4,000 open debt balance or $200, will be counted as a monthly expense towards debt to income ratios qualification.

How To Apply For VA Loans With Collections

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 [email protected] The team at GCA Mortgage Group is available 7 days a week, on evenings, weekends, and holidays.