FHA Loans With Collections and Charge Offs Mortgage Guidelines
This Article On HUD Guidelines On Collection And Charged-Off Accounts On FHA Loans
2021 HUD Guidelines On Collection And Charged-Off Accounts On FHA Loans:
HUD is the parent of FHA. One of the main mission of HUD is to promote homeownership to hard working American families with little down payment and lenient agency mortgage guidelines on FHA loans. FHA loans is one of the most popular home mortgage program in the nation. Lenders aggressively originate and fund FHA loans to homebuyers with credit scores as low as 580 FICO with 3.5% down payment with unpaid collections and/or charged-off accounts. Outstanding and/or charged-off accounts do not have to be paid to qualify for FHA loans. Borrowers with a prior bankruptcy and/or foreclosure can qualify for an FHA loan after meeting the waiting period requirements.
Understanding HUD Guidelines Versus Lender Overlays On FHA Loans
Over 75% of our borrowers at Capital Lending Network, Inc. are folks who could not qualify for an FHA loan at other lenders. FHA loans is one of the three government-backed loans available in today’s mortgage market. The other two government-backed loans are VA and USDA loans. Government-backed loans are originated and funded by a government agency but are originated and funded by lenders. In the event if a government-backed loan defaults, and/or goes into foreclosure, the government agency backing the loan will partially insure and guarantee the lender against the loss sustained. However, in order for the government agency to insure the loss sustained by the lender, the lender needs to follow the agency guidelines of the government agency. The three government agencies are HUD, VA, and USDA. All lenders need to follow the minimum agency guidelines of HUD, VA, USDA, Fannie Mae, Freddie Mac. Fannie Mae and Freddie Mac are the government sponsored enterprises (GSE) that set up the agency guidelines on conventional loans. However, lenders can have higher lending requirements that are above and beyond the minimum agency mortgage guidelines of HUD, VA, USDA, Fannie Mae, Freddie Mac. These higher lending requirements that is above and beyond the minimum agency mortgage guidelines are called lender overlays. Not all lenders have the same lending requirements on FHA, VA, USDA, and Conventional loans. Most mortgage companies have lender overlays on government and conventional loans. Just because you do not qualify at one lender on an FHA loan does not mean you cannot qualify at a different lender. However, Capital Lending Network, Inc. is one of the very few mortgage companies with no lender overlays.
Capital Lending Network, Inc. is one of the very few mortgage companies licensed in multiple states with no lender overlays on government and conventional loans.
HUD Guidelines On Collection And Charged-Off Accounts Versus Overlays By Mortgage Companies
Why do some lenders require borrowers to pay unpaid collection accounts and/or charged-off accounts?
All owner-occupant mortgage programs do not require unpaid collections and/or charged-off accounts to be paid per agency mortgage guidelines. HUD, VA, USDA, Fannie Mae, Freddie Mac do not require outstanding collections and/or charged-off accounts to be paid off. However, HUD has the most lenient agency guidelines when it comes to getting an approve/eligible per automated underwriting system (AUS) with outstanding collections and charged-off accounts. Although borrowers have unpaid collections and/or charged-off accounts, the borrower will need to get an approve/eligible per automated underwriting system (AUS). Even though the automated underwriting system gets you an approve/eligible per AUS, the individual lender can require that you pay the unpaid collections and/or charged off accounts and have a zero balance.
Why is this the case?
This is because lenders can have their own lending guidelines that is above and beyond the minimum agency guidelines which is called lender overlays. If you are told that you do not qualify for a mortgage with unpaid collections and/or charged-off accounts, just change lenders where they have no lender overlays. Capital Lending Network, Inc. has no lender overlays on government and conventional loans. As long as you have an approve/eligible per AUS, we have zero lender overlays and just go off the automated underwriting system findings. The team at Capital Lending Network, Inc. are experts in helping borrowers with prior bad credit and outstanding unpaid collections and/or charged off accounts.
How Do Mortgage Underwriters View Unpaid Collections And Charged-Off Accounts
As we have been mentioning throughout this blog, borrowers do not have to pay outstanding collections and/or charged off accounts to qualify for an owner-occupant primary home mortgage loan. FHA loans are the most lenient when it comes to outstanding collections and/or charged off accounts. Collection accounts are categorized into medical collections and/or non-medical collection accounts. Non-medical collections are treated differently than non-medical collections. If a borrower has an outstanding collection accounts on non-medical collection accounts with an unpaid balance greater than $2,000, lenders will require mortgage underwriters take 5% of the outstanding collection balance and use that figure as a hypothetical monthly debt when calculating the borrower’s debt to income ratio. The borrower does not have to make any payments. It is just a hypothetical monthly debt that is required to be used as a monthly hypothetical debt by all lender. If the outstanding balance is less than $2,000, the 5% rule is exempt. If the outstanding balance is a large amount, the borrower can enter into a written payment agreement with the creditor. The borrower can negotiate a monthly payment amount and the agreed upon monthly payment can be used in the debt to income ratio calculations versus the hypothetical monthly payment. There is no seasoning requirement for this agreed upon monthly payment with the creditor to take effect. It can take effect the day it has been executed between the borrower and the creditor. Charged off accounts are exempt from the 5% hypothetical monthly payment rule. Medical collections are exempt as well from the 5% hypothetical monthly payment rule. Borrowers can have large outstanding balance on medical collections and/or charged off accounts and it will not affect them from qualifying for a mortgage.