FHA Guidelines On Charge Offs And Collection Accounts
Gustan Cho Associates

FHA Guidelines On Charge Offs And Collection Accounts

This BLOG On FHA Guidelines On Charge Offs And Collection Accounts Was UPDATED On December 7th, 2018

Before we start looking at the rules, it’s very important to point out that the information listed here are FHA minimum standards.

  • A given lender or financial institution may have more strict requirements depending on circumstances, state laws, or other factors
  • Remember that FHA loan rules don’t override state law and lenders are free to require higher standards as long as they are in compliance with federal laws

When it comes to collections on a borrower’s credit report, FHA loan rules in HUD 4000.1 FHA Handbook instruct the lender.

Types Of Mortgage Guidelines

There are two sets of mortgage lending guidelines:

  • The first set of guidelines is directly from FHA, the Federal Housing Administration
  • The second set of guidelines is an optional mortgage guidelines required by lenders which are called lender overlays
  • There are many types of lender overlays
  • Overlays are additional mortgage guidelines that is instituted by each individual mortgage lender that is above and beyond those of HUD Guidelines

FHA does not require borrowers to pay outstanding collections and/or charged off accounts to qualify for FHA Loans. FHA Guidelines on Charge Offs and Collections are individual mortgage lender overlays.

What Are Lender Overlays?

FHA Mortgage lender overlays are mortgage lending guidelines that a particular mortgage lender will impose in addition to those set by the Federal Housing Administration, FHA.

  • For example, FHA may allow a mortgage loan applicant with unpaid collection accounts to qualify for a FHA insured mortgage loan without having to pay it off under FHA Guidelines on Charge Offs and Collections
  • However, a particular mortgage lender may require all collection accounts to be paid off even though FHA does not require it
  • This is called mortgage lender overlays
  • Same with credit scores
  • HUD requires a minimum credit score of 580 FICO from any mortgage loan applicant for them to qualify for a 3.5% down payment home purchase FHA insured mortgage loan

FHA Guidelines On Credit Scores

Many, if not most, set their own standards with regards to minimum credit scores.

  • Most banks and mortgage companies do have mortgage lender overlays on minimum credit scores
  • Most require 620 FICO credit scores and a large percentage of mortgage lenders such as banks
  • Most credit unions, require 640 FICO credit scores or higher
  • HUD only requires a 580 FICO credit score to qualify for 3.5% down payment FHA Home Loan
  • Out team, at The Dale Elenteny Team at Gustan Cho Associates have a national reputation of representing a national five star mortgage companies with zero overlays on government and conventional loans

There are lenders, such as myself, that do not have any overlays. We will just go off the automated findings of the Automated Underwriting System. We have no other higher FHA Guidelines than the minimum FHA mortgage lending guidelines.

FHA Guidelines On Charge Offs And Collection Accounts

As long as borrowers meet the minimum FHA guidelines, The Gustan Cho Team at Loan Cabin Inc. has no overlays on FHA, VA, USDA, Fannie/Freddie mortgage loan programs.

FHA Guidelines on Unpaid Collection Accounts

FHA Guidelines does not require for you to pay off existing unpaid collection accounts.

However, FHA Guidelines does classify collection accounts into three separate categories

  1. Non-Medical Collection Accounts
  2. Medical Collection Accounts
  3. Charge Off Accounts

Types Of Collection Accounts

FHA has different categories on the types of collection accounts and FHA Guidelines On Charge Offs And Collection Accounts with these different types of derogatory accounts.

  • Non-Medical Collection Accounts
    • Any non-medical collection account with a total aggregate unpaid balance of $2,000 is ignored by FHA Guidelines
    • Unless the particular lender may have their own lender overlays on paying unpaid non-medical collection accounts
    • If the unpaid non-medical collection accounts are greater than $2,000, then HUD requires lenders to take 5% of the unpaid collection balance and calculate it on the calculations of the debt to income ratios
    • The 5% does not have to be paid but it is just used for DTI Calculation purposes
    • If the 5% calculations are too much and will not qualify the mortgage loan applicant, then the mortgage loan applicant can make a written payment agreement with the collection agency
    • The amount agreed upon as the monthly payment will be used to calculate the debt to income ratios
    • Medical Collection Accounts
      • Medical Collections are treated differently than non-medical collection accounts.
      • The 5% rule is exempt
      • No matter how much the medical collection account outstanding balance is, no portion of it is taken out and used for debt to income ratio calculations

FHA Guidelines On Credit Disputes

Credit Disputes are frowned upon by all lenders.

  • Credit Disputes are not permitted during the mortgage process on non-medical collections and charged off accounts
  • The mortgage process will come to a suspense status unless the credit dispute is removed
  • A new credit report needs to be pulled to reflect the corrected updated credit report with the credit disputes retracted by the consumer
  • Reason being is when a consumer disputes a credit tradeline, the credit bureaus automatically discounts the negative item from the credit scoring model
  • So if the negative credit item is disputed by the consumer, the credit bureaus will take that negative item off the scoring model like it does not exists
  • Therefore, consumer credit scores will increase when there is a disputed tradeline
  • When the dispute is retracted or resolved and remains as a derogatory, that negative item is factored back in to the credit scoring model
  • Therefore, all credit disputes that are retracted, the consumer credit scores will drop.
  • The extent of the drop depends on how recent the derogatory item is

FHA Guidelines On Credit Disputes On Medical Collections

Medical collections are exempt with credit disputes.

  • Borrowers can have credit disputes on medical collections
  • For medical collections, there is no restrictions on unpaid collection account balances
  • It is often ignored unless the particular lender may have their own overlays

Can I Qualify For FHA Loan With Charge Offs? YES!

  • Old collection accounts that the creditor deems uncollectible are charged off on credit report
  • HUD Guidelines On Charged Off Collection Accounts does not require borrowers to pay off
  • Outstanding charged off accounts to qualify for FHA Loans
  • If a borrower goes to a lender and that lender tells the borrower that they do not qualify for a FHA Loan due to charge off, it is because of that lender overlays and NOT HUD Guidelines
  • Borrowers cannot have credit dispute on charged off accounts
  • The credit dispute needs to be removed
  • The mortgage process will come into a complete halt if there are credit dispute
  • Once credit disputes are retracted, borrower’s credit scores will drop

FHA Guidelines On Charge Offs And Collection Accounts: What Are Charge Offs?

A charge off is when a creditor writes the debt off as uncollectible.

  • Many consumers may have unpaid collection accounts that reports as charge offs on their credit reports
  • Charge offs do not count and FHA does not require any charge offs to be paid off since it has been written off
  • Also, those with charge offs will find it next to impossible to pay the charge offs
  • This is because nobody can technically take their payments since it has been written off their books

About The Author Of FHA Guidelines On Charge Offs And Collection Accounts

Dale Elenteny is the author of FHA Guidelines On Charge Offs And Collection Accounts. Dale is a senior mortgage advisor of Gustan Cho Associates, the national consumer direct division of Loan Cabin Inc. NMLS 1657322. Dale Elenteny is a guest writer for Gustan Cho Associates Mortgage Group. Dale has has extensive experience in real estate, commercial and residential lending, and real estate investments. A real estate investor himself, Dale is also a licensed mortgage loan originator in multiple states and has a national reputation of helping borrowers get qualified for mortgages where others cannot. Dale Elenteny of Gustan Cho Associates does not give up. It is not if you get a loan with Matt but when. Stay tuned for more blogs by Dale Elenteny of Gustan Cho Associates.

This BLOG On FHA Guidelines On Charge Offs And Collection Accounts Was UPDATED On December 7th, 2018