FHA Loan With Collection And Charge Off Accounts
Gustan Cho of The Mortgage Post Team

Can I Qualify For FHA Loan With Collection And Charge Off Accounts?

Qualifying For FHA Loan With Collection And Charge Off Accounts Without Paying Them

FHA Loans is the most popular loan program in the United States due to its leniency.

  • FHA is part of the United States Department of Housing and Urban Development and its mission and role is to promote home ownership
  • FHA is not a lender and has nothing to do with originating loans nor does it fund any residential home loans
  • FHA is a governmental agency under the umbrella of HUD
  • FHA acts as a federal mortgage insurance entity
  • It insures banks and private lenders who originate and fund FHA Loans
  • In order for the Federal Housing Administration to insure lenders on a FHA Loan that the borrower is defaulting on, the lending institution needs to make sure that the borrower meets FHA Guidelines with regards to credit and income
  • If any of the FHA Guidelines are not met, the defaulted FHA Loan is not insurable by FHA and the lender is stuck with the loss
  • FHA does not require outstanding collections and charge offs to be satisfied for borrowers to qualify for a FHA Loan
  • Borrowers do not have to worry about paying older collection accounts or charge off accounts from the past in order to qualify for a FHA Loan

Why Do Lenders Require To Pay Unsatisfied Collections And Charge Offs?

Many of our viewers are told by lenders that they do not qualify for FHA Loans due to outstanding collections and charge off accounts.

  • You can qualify for FHA Loan With Collection And Charge Off Accounts under HUD Guidelines
  • However, the particular lender may require you to pay off all outstanding collection account balances as well as charge off accounts
  • This often confuses borrowers
  • This is because lenders are telling them one thing opposite of what HUD Guidelines on collections and charge offs are
  • The reason for this is due to the fact that lenders are allowed to have overlays which are additional higher sets of mortgage guidelines that are above and beyond of those of HUD

This may be hard to understand so let me use example to simplify what overlays are:

  • Most lenders have lender overlays on countless of items that contradict FHA Guidelines
  • There are two types of FHA Loan Requirements:
    • FHA Guidelines and Mortgage Lender Overlays
  • All lenders need to meet the minimum FHA Mortgage Requirements
  • However, lenders can set higher lending standards than the minimum standards of FHA
  • This is what you call a lender overlay and it is perfectly legal for a lender to do so
  • Borrowers can qualify for FHA Loan With Collection And Charge Off Accounts without having to pay them off and FHA will insure the mortgage to the lender
  • Lenders may choose to have borrowers pay off the outstanding collections and charge offs as part of their overlays
  • This is called a lender having overlays on collections and charge offs
  • Borrowers can qualify for a FHA Loan After Chapter 13 Bankruptcy Discharge with no waiting period under HUD Guidelines
  • However, many lenders like Chase Bank will require a one year or longer waiting period after a Chapter 13 Bankruptcy Discharge
  • This holds true even though FHA does not require any waiting period
  • This is an overlay that Chase Bank has on waiting period after Chapter 13 Bankruptcy discharge date
  • Many banks including Chase Bank does not allow collection accounts and charge off accounts
  • This holds true even though FHA states that you do not have to satisfy outstanding collections and charge offs

FHA Guidelines On Collection Accounts

FHA Classifies Collection accounts into two categories:

  • Non-Medical Collections
  • Medical Collections

HUD allows up to $2,000 of unpaid outstanding non-medical collection accounts with outstanding balances before it starts affecting debt to income ratios.

  • If you have more than $2,000 in outstanding non-medical collection account balances, HUD requires lenders to take 5% of the outstanding collection balance
  • 5% of outstanding collections is used as hypothetical debt
  • This is counted as if it were part of the borrower’s monthly debt payments
  • The borrower does not need to pay anything but the 5% figure is used in the calculation of the borrower’s debt to income ratios when qualifying the borrower
  • If the outstanding collection account  balance is substantially of a larger amount, the borrower can enter into a written payment agreement with the creditor
  • The amount agreed upon can be used as the monthly debt payment in lieu of the 5% figure
  • There is no payment seasoning requirement
  • The amount agreed upon is effective the day that both the borrower and creditor enter into a written payment agreement

Medical collection accounts is exempt from including a percentage of the medical collection balance in calculating debt to income ratios.

FHA Guidelines On Charge Off Accounts

HUD does not require charge off accounts to be paid to qualify for FHA Loans no matter how much the charge off account balance is.

  • There is no impact on charge off accounts and debt to income ratios
  • No percentage of the charge off needs to be taken as a monthly debt like non-medical collection accounts
  • However, you cannot have any credit disputes on non-medical collection accounts where the aggregate balance is greater than $1,000 or any charge off accounts
  • When you look at a consumer credit report with a charge off account, you will see the amount of the charge off account balance
  • Disregard that balance because all charge off accounts have balances reporting on the consumer credit report

Finding A Lender To Qualify FHA Loan With Collection And Charge Off Accounts

If you have outstanding collection and charge off accounts and are told that you do not qualify for a FHA Loan with collection and charge off accounts, please contact us at Gustan Cho Associates. The Gustan Cho Team at Loan Cabin Inc. is a national five star mortgage banking firm licensed in multiple states with no overlays on FHA Loans, VA Loans, and Conventional Loans. Unfortunately, when you go to a bank or other lender, they often do not tell you that you may not qualify with them due to their lender overlays on collections and charge offs but you may qualify with a lender who has no overlays. We are available 7 days a week, evenings, weekends, and holidays to take your mortgage inquiries. You can call us at 262-716-8151 or text us for faster response. Or email us at gcho@gustancho.com.