Written Payment Agreements With Creditors And Collection Agencies

This BLOG On Written Payment Agreements With Creditors And Collection Agencies Was UPDATED And PUBLISHED On June 13th, 2020

Cases Where Written Payment Agreements With Creditors Are Required:

FHA Loans does not require outstanding collection accounts with outstanding balances to be paid off and/or satisfied for a mortgage loan. There are two types of categories of collection accounts with FHA Loans; Medical Collections and Non-Medical Collections.

• FHA exempts medical collection accounts with outstanding credit balances no matter how much the outstanding medical collection balance is.
• FHA will not require that a percentage of the outstanding collection balance be used in the calculation of the mortgage loan borrower’s debt to income ratio
• FHA also does not count any charge off accounts and all non-mortgage charge off accounts, no matter how much the balance, are exempt from debt to income ratio qualifications

In this article, we will discuss and cover Payment Agreements With Creditors And Collection Agencies.

How Are Mortgage Charged-Offs Accounts Viewed By Underwriters

Mortgage charge offs are treated differently:

• Whether it is a first mortgage or second mortgage, there is a three year mandatory waiting period to Qualify For FHA Loan After Mortgage Charge Of
• With Conventional Loans, there is a mandatory 7-year waiting period to qualify for Conventional Loan After Mortgage Charge Off
• The mortgage charge off can be after bankruptcy and/or foreclosure
• Lenders do not want to see any late payments after bankruptcy and/or housing event

Now, with written agreements with creditors come into play for borrowers who have large amounts of outstanding collection accounts balances.

Written Payment Agreements With Creditors For Those With Large Outstanding Collection Account Balances

As mentioned in the previous paragraph, the Federal Housing Administration does not require that outstanding collection accounts be paid off in order for the FHA mortgage loan borrower to qualify for an FHA Loan.

• Medical Collection Accounts are treated differently than non-medical collection accounts
• Medical collection accounts and charge off accounts, with outstanding balances, are exempt from any percentage of the outstanding collection account balance in the calculation of debt to income ratios
• However, with non-medical collection accounts, if consumers have a total of $2,000 or greater in outstanding collection accounts, then 5% of the outstanding collection account balance will be used in calculating debt to income ratios
• This may not be a big issue for some borrowers with smaller outstanding account balances
• However, if a borrower has larger outstanding collection balances, the 5% of the outstanding calculations may disqualify the borrower due to exceeding the maximum debt to income ratio caps

However, FHA allows written payment agreements with creditors to be used in lieu of the 5% deduction of outstanding collection accounts.

Case Scenario 

For example, if the borrower has $10,000 in total outstanding collection accounts, then HUD will mandate that 5% of the $10,000 or $500 need to be used in the calculation of the borrower’s debt to income ratios:

• $500 per month monthly payment is huge and it is equivalent to a $100,000 mortgage payment (principal and interest)
• The $500 will be used in the calculation of debt to income ratios even though consumers do not have to pay anything every month
• However, if consumers were to set up a written payment agreement with creditors and have a $200 written payment agreements with creditors, then the $200 will be used in lieu of the $500 in the calculation of the debt to income ratio
• There are no seasoning requirements on the number of minimum payments to be made once the written payment agreements with creditors are signed by both the creditors and debtor on collection accounts

This is different from judgments and tax liens.

Written Payment Agreements With Creditors On Judgments And Tax Liens

The Federal Housing Administration will insure borrowers with judgments and tax liens if and only if the borrower has written payment agreements with creditors.

• Borrowers also need to have at least three months of payment history
• They need to provide proof of three months of canceled checks and/or bank statements showing payment to the creditor and/or the Internal Revenue Service
• Written Payment Agreements With Creditors FHA rules are different with judgments and tax liens
• With outstanding collection accounts, as long as both parties sign the written payment agreements with creditors, that date is the effective date and the lender can use the amount on the written payment agreements with creditors even if a single payment has not been made
• With Written Payment Agreements With Creditors on judgments and tax liens, the borrower needs to make three months of minimum payments and they cannot make all three future payments all at once and qualify

FHA requires that three consecutive payments have been made and no upfront advance payments will suffice.

Written Payment Agreements With Creditors: Lenders With Overlays On Collection Accounts

Just because borrowers meet FHA Guidelines On Collection Accounts does not mean that a particular lender will do the FHA Loan. Many banks and mortgage lenders, for example, will not take on a borrower with any collection accounts with outstanding collection balances. Many others will not accept any borrowers who had any outstanding collection accounts that have been paid for at least two years. Although FHA Guidelines do not require to satisfy outstanding collection account balances, these banks and lenders do not accept them due to their mortgage lender overlays. Overlays are the mortgage lender’s own set of rules and requirements on top of federal minimum mortgage lending guidelines. Borrowers turned down for a mortgage loan due to overlays but do meet the federal lending guidelines, please contact us at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. We are an aggressive mortgage lender with no overlays and just go off the federal minimum mortgage lending guidelines.