FHA Lending Guidelines on Collection Accounts and Charge-Offs

In this article, we will cover and discuss FHA lending guidelines on collection accounts and charge-offs. Per FHA lending guidelines on collection accounts, borrowers do not have to pay outstanding collections and charge-off accounts with outstanding balances, Collection accounts with outstanding balances and charged-off accounts do not have to be paid to qualify for FHA Home Loans.

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Can You Buy a House If You Have Collection Accounts?

It is certainly possible to qualify for an FHA mortgage with accounts in collection but you may need to set up a payment plan, depending on the amount you owe. The collections may also impact your credit score, which may affect your ability to get approved for the loan. Many people have questions about the finance part of the process. A common question we hear is, “Can I buy a home if I have collections on my credit report?” Fortunately, the answer is yes.

Consumers who had a financial hardship and fell behind on their payments most likely have collection accounts with balances still owed to them. Many collection agencies have given up on trying to collect on collection accounts. The older the collection account is, the less of a likelihood it will be it will turn into a judgment.

Changes To FHA Lending guidelines on Collection Accounts

The good news is borrowers can still get qualified for FHA Loans with unsatisfied collection accounts. The bad news is that early in 2014, new mortgage lending guidelines have been implemented with regard to FHA loans and collection accounts. Prior to the new 2014 rules and regulations on collection accounts, unsatisfied collection accounts with regard to debt-to-income calculations were ignored by mortgage underwriters. However, new rules and regulations were implemented in regard to collection accounts in 2014.

Classification of FHA Lending Guidelines on Collection Accounts

Collection accounts are now classified into two categories:

Non-medical collections and medical collections
Medical collection accounts are normally ignored when it comes to mortgage lending underwriting guidelines and debt-to-income ratio calculations

Non-medical collections now do count toward the calculation of debt-to-income ratios. Prior to 2014, open balances on collection accounts could have been ignored and exempted from debt-to-income ratio calculations. Now, things are different.

HUD Guidelines on Non-Medical Collection Accounts

With non-medical collection accounts with open unsatisfied balances, the maximum amount HUD will allow will be $2,000. For all collection accounts with aggregate unpaid unsatisfied collection account balances of $2,000 or greater, 5% of the unpaid unsatisfied balance will be counted towards the calculation of the borrower’s debt-to-income ratio calculations.

For example, if a borrower’s unpaid old non-medical collection account balances of $20,000, 5% of the $20,000, which is $1,000 will be used towards the calculation of the borrower’s debt-to-income ratios. The borrower does not have to pay this and it is just a hypothetical debt underwriters need to use.

Solution To Large Outstanding Balances on Collection Accounts

There is a solution with regard to high open credit balances on unpaid unsatisfied collection account balances. FHA Lending Guidelines On Collection Accounts will allow a written payment agreement in lieu of the 5% of the collection account balance. The good news is the day the written payment agreement is in effect, the underwriter will go with that date and no seasoning requirement is required. For example, let’s take a case scenario

a borrower with an outstanding balance of $20,000 with a collection agency
has set up a payment agreement for them to pay $200.00 per month
the $200.00 per month will be used towards the calculation of the borrower’s debt-to-income ratios instead of the 5% of the $20,000, or $1,000.00

FHA Lending Guidelines on Collection Accounts and Disputes

There are new rules and guidelines when it comes to FHA Lending Guidelines on Collection Accounts and Credit Disputes of derogatory items. Again, credit disputes are now classified into two categories. Medical disputes and non-medical disputes. There are no rules when it comes to medical disputes and borrowers can have active medical disputes during the mortgage process.

HUD Guidelines on Credit Disputes

A consumer can dispute any medical derogatory collection accounts with the three major credit reporting agencies. Outstanding credit collection account balances on medical collections will not affect their mortgage loan application process. However, there are strict new rules and guidelines in 2014 for non-medical credit disputes. Borrowers cannot have an active dispute against a derogatory credit item with any of the three major credit bureaus which the balance amount is greater than $1,000.00 during the mortgage process.

HUD Guidelines on Zero Balance Credit Disputes

Zero balance derogatory tradelines and charge-offs are exempt from this rule. In the event, that there is a pending credit dispute that is non-medical and greater than a $1,000.00 unpaid unsatisfied credit balance, then the dispute needs to be retracted. One problem with a retraction is that once a dispute is retracted from the credit reporting agencies, the chances are that the consumer’s credit scores will drop.

Mortgage Lenders For Bad Credit With No Overlays

Borrowers who need to qualify for an FHA loan with a lender with no mortgage overlays on government and conventional loans, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and during holidays.

This blog on FHA lending guidelines on collection accounts was updated on October 9th, 2022.