Mortgage Guidelines On Charged-Off Accounts Versus Lender Overlays

by Gustan Cho

This Article Is About Mortgage Guidelines On Charged-Off Accounts Versus Lender Overlays

Mortgage Guidelines On Charged-Off Accounts do not require borrowers to pay outstanding non-mortgage charged-off accounts to be paid off on owner-occupant primary home government and conventional loans.

  • This holds true no matter how large the outstanding charge off amount is
  • Fannie Mae and Freddie Mac only exempt charged-off accounts on owner-occupant conventional loans ONLY
  • This rule does not apply to conventional loans on investment properties
  • There are two types of charged-off accounts
  • Non-mortgage and mortgage charged-off accounts
  • We will discuss mortgage charged-off accounts later on this blog

In this article, we will discuss and cover Mortgage Guidelines On Charged-Off Accounts Versus Lender Overlays.

Mortgage Guidelines On Charged-Off Accounts: Do Charged-Off Accounts Have To Get Paid To Qualify For A Mortgage?

charge off

Most homebuyers do not realize they can qualify for a home mortgage with unpaid outstanding collection and charged-off accounts.

  • Unpaid collection and charged-off accounts do not have to be paid in order to qualify for an owner-occupant home loan
  • FHA, VA, USDA, Fannie Mae, Freddie Mac does not require borrowers to pay outstanding collections and charged-off accounts to be paid to qualify for a mortgage
  • Lenders fully understand financial crisis strikes among the best of us
  • Periods of job loss, health issues, divorce, death in the family, and other extenuating circumstances happen in life
  • With extenuating circumstances such as unemployment, it will disrupt the income stream of consumers
  • With income disruption, consumers cannot pay their bills which will negatively affect their credit as well as drop credit scores
  • However, most Americans eventually recover
  • They get new jobs or change career paths where they make more money
  • Older bills and charged-off accounts do not have to be paid to qualify for a mortgage
  • Older collections and charged-off accounts have less of an impact on consumer credit scores as it ages
  • Credit repair is not required to get collections and/or charged-off accounts removed from consumer credit reports

Credit disputes are not allowed during the mortgage process unless the disputes are exempt from retraction. Credit repair during the mortgage process can do more damage than good.

Collection And Charged-Off Accounts Explained

collections

When a creditor does not get their monthly scheduled payments by the consumer, late payment notices will be sent.

  • If the creditor does not receive the minimum monthly payment for four consecutive months, the creditor will assume the consumer is not going to pay their debts going forward
  • After four months, most creditors will charge off the debt
  • Creditors can try to collect on the collection and/or charged-off accounts themselves or can hire a third-party collection company
  • A charged-off account does not relieve the consumer from paying the debt
  • Creditors can still try to collect on charged-off accounts
  • Many creditors will sell their charged-off accounts to third-party collection agencies for pennies on the dollar
  • Collection agencies that purchase charged-off accounts will aggressively try to collect on older charged-off accounts
  • Collection agencies can even try to sue consumers with outstanding charged-off accounts and get a judgment on them
  • Keep an eye on and research the statute of limitations in your state on collections and charged-off accounts

Many creditors will ignore the statute of limitations on debt and will still try to proceed in milking anything they can from consumers.

How Does A Credit Account Go Into Collections And Charged-Off Account Status

credit

Creditors will remind consumers who forgot to make their minimum monthly debt payment. All creditors will give a 30 day grace period for consumers to make their monthly minimum payment. Creditors will not report any payments that are received within the 30-day grace period to the credit bureaus. 30-day late payments are reported on any minimum monthly payment that is paid past the 30-day grace period.

Below are the verbiage credit bureaus will post on derogatory credit tradelines:

  • 30 days late
  • 60 days late
  • 90 days late
  • 120+ days late
  • Collection
  • Charge off account
  • Included in bankruptcy
  • Foreclosure (mortgages only)
  • Repossession (cars or other similar assets)
  • Judgment

The above terms are reported on consumer credit reports. Derogatory credit tradelines that start off as 30 days late can lead to collections, charged-off, and eventually a judgment and/or included in bankruptcy.

Mortgage Guidelines On Charged-Off Accounts: Non-Mortgage Versus Mortgage Charged-Off Accounts

Charged-Off Accounts

The key in getting an approve/eligible per automated underwriting system (AUS) is to have been timely on all your minimum monthly payments in the past 12 months. No late payments in the past 12 months is key. As mentioned many times over in earlier paragraphs, outstanding charged-off accounts do not have to be paid off to qualify for an owner-occupant mortgage loan as long as you can get an approve/eligible per automated underwriting system (AUS). However, you should have been timely on all of your payments in the past 12 months. It is alright for you to get new charged-off accounts and/or collection accounts reporting on your credit report in the past 12 months. However, the date of last activity (DLA) should be older than 12 months. Third-party collection agencies will buy and sell collection accounts all the time. Lenders and the automated underwriting system will go off the date of last activity (DLA) of the consumer. The date of last activity is the date the consumer last paid to the creditor. There are two types of charged-off accounts. Non-mortgage charged off accounts do not have to be paid to qualify for a government and/or conventional loan. However, there are borrowers who had a prior second mortgage charged-off account. If you had a prior second mortgage charged off and still own your home, you will need to pay the second mortgage charge off account. This is because the second mortgage has a lien on the home. They will not release the lien on the house unless the second mortgage charged-off account has been paid off. It can be negotiated but the lien needs to be removed. If the first mortgage of your home with a second mortgage charged-off account has been foreclosed, you do not have to worry about the second mortgage charged-off account.

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Jennifer Christiansen December 31, 2020 - 7:54 pm

Hello Mr. Gustan,

I hope you are doing well. I am currently in chapter 13 with 2 payments left to complete. I had received court permission to purchase a home in Florida however I was unable to relocate from Georgia due to the Corona Virus. I will be relocating to Florida hopefully this summer. I’m trying to find out what lenders I will be able to apply for FHA with after the Ch 13 discharge.

Thanks,

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Mary Jones January 1, 2021 - 7:51 pm

Loan Amount
150000
State
NJ
How Can I Help You With Your Mortgage Needs? I am looking for a NO DOC loan; good score; currently have few rental homes. can put down 25% of 190k purchase price. NEEDS hurry because I wasted almost 4 weeks with a conventional loan.

If can quickly close with a good rate/term; please contact me.

thanks,

Mary

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Denise Ford January 3, 2021 - 1:54 am

We have a deed in lieu of foreclosure for a timeshare we could not use or get rid of. The DIL happened two years ago. We have a large down payment but are unable to get a mortgage due to handing the time share back in.

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