2018 Updated VA Guidelines On Charge Offs And Collections

2018 Updated VA Guidelines On Charge Offs And Collections

This Blog On 2018 Updated VA Guidelines On Charge Offs And Collections Was UPDATED On February 11th, 2018

Per VA Guidelines On Charge Offs And Collections, Veteran Borrowers can qualify for VA Home Loans with outstanding Charge Offs And Collections Accounts.

  • 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 which are VA mortgage requirements that are above and beyond of minimum VA Guidelines issued by the U.S. Department Of Veteran Affairs

The Gustan Cho Team at USA Mortgage is a direct lender licensed in multiple state with no mortgage overlays on VA Loans.

VA Lender Overlays

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

Here are typical lender overlays on VA Home Loans.

  • Most lenders have VA Lender Overlays on credit scores
    • Most lender 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
    • The Gustan Cho Team at USA Mortgage does not have any overlays and does not have a minimum credit score requirement
  • Most VA Lenders has a debt to income ratio cap of 41% to 50% DTI
    • VA does not have a cap on debt to income ratio
    • The Gustan Cho Team at USA Mortgage does not require a maximum debt to income ratio requirement on VA Home Loans
    • We just go off AUS FINDINGS
  • 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

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 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 debt to third party collection agency
    • They may pursue legal proceedings and try to sue 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 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 collection procedure
  • If collection efforts are not successful, a creditor will write 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 charge 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  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, 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

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 mortgage lender that have no mortgage lender 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 mortgage 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
  • The Gustan Cho Team at USA Mortgage has ZERO OVERLAYS on government and conventional loans

Veteran Borrowers looking to qualify for VA Loan with a direct lender with no mortgage overlays, please contact us at The Gustan Cho Team at USA Mortgage at 262-716-8151 or email us at gcho@usa-mortgage.com.

By Gustan Cho

www.gustancho.com

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