Can You Qualify for a Mortgage with Collections?

This Article Is On Can You Qualify For Conventional Loans With Unpaid Collection Accounts

One of the most common questions we get at Capital Lending Network, Inc. is Can I Qualify For Conventional Loans With Outstanding Collection Accounts. FHA loans are the most forgiving loan program when it comes to bad credit. HUD, the parent of FHA, sets the most lenient algorithms on the automated underwriting system (AUS) to get an approve/eligible per AUS with outstanding collections, charged-off accounts, and derogatory credit tradelines.

However, there are instances where borrowers need to go with conventional versus FHA loans. Due to the booming housing market due to historic low mortgage rates, many homebuyers are priced out of the housing market. Home prices keep on increasing nationwide. The maximum FHA loan limit of $356,362 does not make a dent in many areas. Many homebuyers need a higher loan amount. Therefore, they need to opt for conventional loans.

Loan Limits On FHA And Conventional Loans

The maximum 2021 Conforming Loan Limit is capped at $548,250. The conforming loan limit is significantly higher than the FHA loan limit. Therefore, homebuyers who need a higher loan amount need to take the conventional loan route. Other instances where borrowers need to go with conventional loans are borrowers with a large outstanding student loan balance.

Fannie Mae and Freddie Mac allow income-based repayment plans (IBR Payments). Fannie Mae and Freddie Mac accept zero IBR payments on student loans on conventional loans. FHA and USDA loans now accept IBR payments. If you have a mortgage included in a bankruptcy, the waiting period is four years from the discharged date to qualify on conventional loans from the discharged date.

The date of foreclosure, deed in lieu of foreclosure, a short sale do not matter. The mortgage included in bankruptcy cannot be reaffirmed. With FHA, VA, and USDA loans, if you have a mortgage included in a bankruptcy, the discharged date of bankruptcy does not matter. The waiting period starts after the recorded date of the foreclosure and/or deed in lieu of foreclosure. Or the date of the short sale.

Agency Guidelines Versus Lender Overlays By Mortgage Companies

What are agency guidelines versus mortgage lender caps

It is very important for borrowers to understand the agency mortgage guidelines versus lender overlays. Lenders need to have their borrowers meet the minimum agency guidelines on government and conventional loans. FHA, VA, USDA, Fannie Mae, Freddie Mac has their own minimum agency mortgage guidelines. However, most lenders will have higher lending requirements above and beyond the minimum agency guidelines of FHA, VA, USDA, Fannie Mae, Freddie Mac.

These higher lending requirements above and beyond the minimum agency mortgage guidelines are called lender overlays. It is perfectly legal for lenders to impose lender overlays on just about anything. Lenders impose lender overlays on government and conventional loans due to minimizing risk. Mortgage bankers close loans under their company name. Mortgage bankers use their own funds using their warehouse line of credit.

Once the loan closes and funds, they sell the loan on the secondary mortgage market. If the loan turns out to be a bad loan, the mortgage banker needs to buy back the loan they just sold. Due to the potential risks on lower credit profile borrowers, most smaller mortgage bankers have lender overlays.

Government Versus Conventional Loans With Unpaid Collection Accounts

In general, all owner-occupant primary home mortgages do not require borrowers to pay outstanding collection accounts and/or charged-off accounts to qualify for a mortgage. As long as borrowers get an approve/eligible per automated underwriting system (AUS) with outstanding collections, they do not have to pay the unpaid collection accounts. As long as borrowers can get an approve/eligible per automated underwriting system, they meet the agency mortgage guidelines.

Borrowers can get an approve/eligible per AUS with outstanding collections and/or charged-off accounts. They do not have to pay outstanding collections and/or charged-off accounts with AUS Approval. However, many lenders will have lender overlays on unpaid collection accounts as well as charged-off accounts. What this means is even though the borrower gets an approve/eligible per AUS, the lender will require the unpaid collections and/or charged-off accounts to be paid in order for them to qualify for a mortgage.

Capital Lending Network, Inc. has no lender overlays on government and conventional loans. As long as the borrower can get an approve/eligible per AUS, we have no additional lender overlays. We just go off the AUS Findings. Over 75% of our borrowers at Capital Lending Network, Inc. are folks who could not qualify at other lenders due to their lender overlays.

Fannie Mae And Freddie Mac Guidelines On Unpaid Collection Accounts

What are Fannie Mae and Freddie Mac's guidelines for unpaid omnibus accounts

Can I Qualify For Conventional Loans With Unpaid Collection Accounts And Charged-Off Accounts?

Borrowers can qualify for an owner-occupant primary home conventional loan with unpaid collection accounts and charged-off accounts. Per Fannie Mae and Freddie Mac Agency Guidelines, unpaid collection and charged-off accounts do not have to be paid to qualify on an owner-occupant primary residence single-family conventional loan. FHA Loans has the most lenient mortgage lending guidelines with regards to unpaid collection accounts, charge-offs, tax liens, and judgments.

Borrowers need to get an automated underwriting system approval with the unpaid collection and charged-off accounts. FHA AUS is more lenient when it comes to derogatory credit tradelines than Fannie Mae and/or Freddie Mac AUS. Fannie Mae and Freddie Mac Agency Guidelines on Conventional Loans with unpaid collection accounts vary among owner-occupant, second homes, and investment property financing.

Unpaid Collection Accounts On Owner-Occupant Single-Family Homes Guidelines

Fannie Mae and Freddie Mac Agency Guidelines do not require borrowers qualifying for conventional loans on owner-occupant single-family homes to pay outstanding unpaid collections and non-mortgage charged-off accounts. Borrowers can have unpaid collections and/or non-mortgage charged-off accounts regardless of the unpaid balance.

This only holds true on single-family homes and not owner-occupant two to four-unit multi-family homes. Qualifying for conventional loans with outstanding collection accounts on two to four-unit owner-occupant multi-family homes is different than single-family homes. We will discuss Fannie Mae and Freddie Mac Agency Guidelines on collections and/non-charged off accounts in the following paragraphs.

Guidelines On Unpaid Collection Accounts On Owner-Occupant Two To Four Unit Multi-Family Homes

What are the guidelines for unpaid collection bills for multi-family houses with two or four units

Borrowers who intend on buying an owner-occupant two to a four-unit property with unpaid collections and/or non-mortgage charged-off accounts with a conventional loan cannot have unpaid collections and/or charged-off accounts greater than $5,000. Fannie Mae and Freddie Mac Agency Guidelines require borrowers buying a two to four-unit owner-occupant home to pay outstanding collections and/or non-mortgage charged-off accounts larger than $5,000.

Buyers Of Second Homes And Investment Properties With Unpaid Collection Accounts

Borrowers who intend on buying a second home with outstanding collections and/or non-mortgage charged-off accounts with a conventional loan cannot have unpaid collections and/or charged-off accounts greater than $5,000. Fannie Mae and Freddie Mac Agency Guidelines require borrowers buying a second home to pay outstanding collections and/or non-mortgage charged-off accounts larger than $5,000. Borrowers purchasing investment properties with unpaid collections with conventional loans cannot have individual unpaid collections and/or non-mortgage charged-off accounts that are equal and/or greater than $250.00.

Collection accounts that total more than $1,000 need to be paid in full on conventional investment loans.


Peter has 7+ years of experience in residential lending. He is a licensed Realtor in the Chicagoland area.

3 Comments

I need someone to qualify me for a conventional mortgage. I found a house and I signed the contract already. I have been talking to Michelle McCue but I cannot find her number. Can someone have Michelle McCue call me back or email me at kbeck1971@gmail.com. Or if another loan officer can call me back, it will be greatly appreciated.

Right now we are in a chapter 13. We have sold our house in Fl. and closing on Dec 9th the court has approved and is allowing us to keep our proceeds. She is also allowing us to pay of our chapter 13 early. Soon as we close she will give us payoff amount. We have been in chapter 13 for 3years and 4months.We have never been late and our house pavment is included in the chapter 13. We found a house in Indiana we want and have a bid in on it but expires today at noon.we were not able to get a pre approval letter. Can you help us ?

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