FHA Loans With Collection Accounts

Homebuyers with prior bad credit can qualify for FHA Loans With Collection Accounts. Outstanding collection accounts do not have to get paid to qualify for an FHA loan. FHA loans are the most popular loan program for homebuyers with bad credit and outstanding collection accounts.

Will I Get Approved For An FHA Loan With Bad Credit?

Will I Get Approved For An FHA Loan With Bad Credit?

FHA Loans With Collection Accounts Guidelines were just released and state outstanding collection accounts do not have to be paid to qualify for FHA loans. HUD, the parent of FHA,  does not require borrowers to pay off outstanding collection accounts to qualify for FHA loans.

Why Do FHA Lenders Have Different Lending Requirements on FHA Loans?

Many home buyers are told by lenders that they do not qualify for an FHA loan due to outstanding collection accounts. But that is not because of HUD Guidelines. It is due to the individual mortgage lender overlays. Lender overlays are lending requirements that are above and beyond the minimum agency mortgage guidelines.

Understanding Lender Overlays Versus HUD Guidelines

Most lenders do have lender overlays. Just because a borrower does not qualify at one lender does not mean they cannot qualify for a mortgage at a different lender. Capital Lending Network, Inc. is one of the very few mortgage companies with no lender overlays on government and conventional loans.

Capital Lending Network, Inc. just go off the automated findings of the automated underwriting system (AUS). We have zero lender overlays. In this article, we will cover and discuss FHA Collections Guidelines To Qualify For FHA Home Loans.

Can I Get An FHA Loan Approval With Collection Accounts?

Can I Get An FHA Loan Approval With Collection Accounts?

Banks and mortgage lenders can have their own set of lending guidelines called overlays. Mortgage Overlays are additional mortgage requirements that are on top of the HUD Collections Guidelines. Even though HUD, the parent of FHA, does not require outstanding collection accounts to be paid off, the individual bank or mortgage company may require that all outstanding collection accounts be paid.

What If I Am Told I Do Not Qualify For an FHA Loan?

Borrowers told they do not qualify for an FHA loan by a bank or mortgage company due to having outstanding unpaid collection accounts, please contact us at 800-900-8569. CLN has no FHA Lender Overlays on an outstanding collection account. We just go off the minimum FHA mortgage lending guidelines.

FHA Lenders For Bad Credit

Many of my borrowers have unpaid outstanding collection accounts. We have no issues in qualifying and closing on their FHA home loans. In this article, we will be discussing the 2022  FHA Loans With Collection Accounts Guidelines and how mortgage underwriters classify the various types of collection accounts, and how you can qualify for an FHA Loan with unpaid outstanding collection accounts.

2022 FHA Loans With Collection Accounts Guidelines On Non-Medical Versus Medical Collections

2022 FHA Collections Guidelines classify collection accounts into four categories

  • Medical Collection Accounts
  • Non-Medical Collection Accounts
  • Non-Mortgage Charge Off Accounts
  • Mortgage Charge Off Accounts

HUD Does Not Require Collections To Be Paid To Qualify For FHA Loans

As mentioned earlier, the 2022  FHA Loans With Collection Accounts Guidelines do not require borrowers to pay off unpaid outstanding collection accounts to qualify for FHA loans. With unpaid outstanding medical collection accounts, debt to income ratios is excluded.

Medical Collections Are Ignored By Mortgage Underwriters

Medical Collections Are Ignored By Mortgage Underwriters

The mortgage underwriter can ignore medical collection accounts with unpaid outstanding medical collection account balances no matter how much the unpaid outstanding medical collection account balance is.

However, with non-medical unpaid outstanding collection accounts with balances of greater than $2,000 (the sum of all non-medical collection accounts with balances), HUD requires that 5% of the outstanding unpaid non-medical collection account balance be used to calculate the borrower’s debt to income ratio.

Written Payment Agreement With Creditors For Larger Outstanding Collection Accounts

If the 5% of the outstanding collection account balance is too much of a hypothetical debt, the borrower can negotiate a written payment agreement with the creditor. Whatever the monthly payment agreement is negotiated, the agreed payment agreement can be used in lieu of the 5% of the outstanding collection account balance.

Case Scenario On How Outstanding Collections Affect Debt To Income Ratio

Let’s take a case scenario where a borrower has $10,000 in unpaid outstanding non-medical collection account balance on all of their collection accounts:

  • HUD requires underwriters take 5% of the $10,000 in unpaid collection balance
  • or $500 per month
  • This is for outstanding collection accounts and NOT charged-off accounts
  • The $500 is used as a hypothetical monthly debt obligation  debt

This holds true even though borrowers do not have to make any payments to the collection agencies and/or creditors.

Credit Disputes Prohibited During Mortgage Process

Borrowers cannot have credit disputes on non-medical collection accounts with unpaid balances of over $1,000 (total outstanding collection account balances on credit report):

  • Borrowers are allowed to have credit disputes on non-medical collection accounts with zero balances
  • Medical Collections are exempt from credit disputes

Non-Mortgage Charged-Off Accounts

The third category on collection accounts is non-mortgage charge-off accounts. FHA ignores charge-off accounts. Treats charge off accounts like medical collection accounts. Borrowers do not have to pay off charge-off accounts no matter what the unpaid outstanding collection account balance is. Borrowers cannot have credit disputes on any charged-off collection accounts. All credit disputes on charged-off accounts need to be removed before proceeding with the mortgage process.

FHA Loans with Mortgage Charged-Off Accounts

FHA Loans with Mortgage Charged-Off Accounts

The fourth and final category on collection accounts is mortgage charge-off accounts. This applies to first and second mortgage charge-off accounts.  HUD does not require borrowers to pay off mortgage charge off accounts. HUD ignores mortgage-charged-off accounts. However, there is a three-year waiting period to qualify for an FHA loan after a mortgage charge off the account. This applies to first and second mortgages.

Charge Off Accounts With Balances

I get so many borrowers who come to me because they were told that they do not qualify by banks and/or other mortgage lenders because they have charged-off accounts with outstanding balances on their credit report. Unfortunately, the mortgage loan originators who are telling potential borrowers that they do not qualify for an FHA Loan due to charge-off accounts with balances do not know how to read credit reports and FHA Guidelines On Charge Off Accounts.

How Mortgage Underwriters View Charged Off Versus Collection Accounts

Most charged-off accounts on credit reports have outstanding unpaid balances reported and that should not matter. The reason that the outstanding unpaid collection balance is reported on the credit report is that that is the amount the creditor has charged off.

Importance of Loan Officer Experience with FHA Loans with Bad Credit

On another note, many mortgage loan originators will tell potential mortgage loan applicants that they do not qualify for an FHA loan after a mortgage charge off account with balance. These inexperienced mortgage loan originators tell borrowers that unless they pay off the mortgage charge-off account and get a zero balance letter by lenders reporting the mortgage charge-off account and that zero balance is reported on their credit report they will not qualify for an FHA loan. This is not true. Most, if not all, mortgage charge off accounts will report a balance on the credit report and this is no issue in qualifying for an FHA loan.

In Conclusion

Borrowers who have been told that you do not qualify for an FHA loan due to collection accounts with outstanding unpaid balances or mortgage charge off accounts with balances, please do not hesitate to contact us at Capital Lending Network, Inc. at 800-900-8569. Our team of licensed and support personnel will help borrowers secure an FHA Loan and make the American Dream of Homeownership become a true reality. The team at Capital Lending Network, Inc.  is available 7 days a week, evenings, weekends, and holidays.


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