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.
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Will I Get Approved For An FHA Loan With Collection Accounts ?
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.
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?
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 888-900-1020. 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 2023 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.
2023 FHA Loans Guidelines On Non-Medical Versus Medical Collections
2023 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 2023 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.
Do You Need 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.
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.
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.
2023 HUD Guidelines On Collection And Charged-Off Accounts On FHA Loans
HUD is the parent of FHA. One of the main missions 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.
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 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 of 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
The fourth and final category of 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 charges 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.
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.
Medical Collections
Non-medical collections are treated differently than non-medical collections. If a borrower has an outstanding collection account on non-medical collection accounts with an unpaid balance greater than $2,000, lenders will require mortgage underwriters to 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 lenders. 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 balances on medical collections and/or charged-off accounts and it will not affect them from qualifying for a mortgage.
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 charges off the account with the 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
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 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.
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 888-900-1020. 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, on evenings, weekends, and holidays.
Most Common Questions About FHA Loan With Collection and Charge Offs
- Can an FHA loan be obtained with a recent collection account for a medical bill?
- Yes, an FHA loan can still be obtained with a recent collection account for a medical bill, as long as the debt has been resolved or paid off.
- Can I qualify for an FHA loan if I have a collection account for unpaid credit card debt?
- Yes, you may still qualify for an FHA loan if you have a collection account for unpaid credit card debt, as long as the debt has been resolved or paid off.
- How long does a collection account have to be paid off before it can be considered for an FHA loan?
- There is no specific time frame for how long a collection account must be paid off before it can be considered for an FHA loan. It will depend on the lender’s underwriting guidelines.
- Are there any guidelines for how much a collection account can be for it to be considered for an FHA loan?
- There are no specific guidelines for how much a collection account can be for it to be considered for an FHA loan. It will depend on the lender’s underwriting guidelines.
- Can an FHA loan be obtained if the collection account is in dispute?
- It depends on the lender’s underwriting guidelines, but some lenders may require that the dispute be resolved before approving an FHA loan.
- Can an FHA loan be obtained if there are multiple collection accounts?
- Yes, you may still qualify for an FHA loan if you have multiple collection accounts, as long as the debts have been resolved or paid off.
- Can an FHA loan be obtained if there is a charged off account?
- Yes, an FHA loan can still be obtained if there is a charged off account, as long as the debt has been resolved or paid off.
- Does having a collection account affect the interest rate for an FHA loan?
- Having a collection account may affect the interest rate for an FHA loan, as the lender’s underwriting guidelines will take into account the borrower’s creditworthiness.
- Are there any special rules for collection accounts that are a result of identity theft?
- Yes, special rules apply for collection accounts that are a result of identity theft. Lenders may require documentation such as police reports and letters from the creditor showing that the account was a result of identity theft.
- Are there any differences between an FHA loan and a conventional loan when it comes to collection accounts?
- Some differences between an FHA loan and a conventional loan when it comes to collection accounts may be the lender’s underwriting guidelines and the credit score requirements. FHA loans may have more lenient guidelines for collection accounts, but this can vary among lenders.
- Can my fiancé buy a house without me and add me to a loan?
- Yes, your finance can buy a house without your collections and later add your name to a title (Quit claim deed )
January 9, 2022 - 10 min read