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FHA Updates Loan Rules On Credit, Collections, and Judgments



A recent reader question asked, “I have an outstanding judgment in the amount of $8000. Can I still get a loan?”

FHA loan rules are clear on the issue of credit, stating that past credit performance and patterns are considered one of the best indicators of whether an FHA loan application should be approved. But recently, the FHA has issued clarifications and updates to lenders on the subject of judgments, collections and other activities that could be considered negative credit data.

According to FHA Mortgagee Letter 2013-24, Handling of Collections and Disputed Accounts, the FHA has amended its guidelines and policies for collections, disputed accounts, and judgments for most credit-qualifying FHA loan transactions. It applies to all affected FHA loans with case numbers assigned on or after October 15, 2013.

According to the mortgagee letter, “Collections and judgments may indicate a borrower’s disregard for credit obligations and must be considered in the creditworthiness analysis. The guidance below applies to loans with collection accounts and all judgments. Medical collections and charge off accounts are excluded from this guidance.

Documentation Requirements: Collection Accounts and Judgments Applicable to Manually Underwritten Loans:

The lender must document reasons for approving a mortgage when the borrower has collection accounts or judgments.
Regardless of the amount of outstanding collection accounts or judgments, the lender must determine if the collection account or judgment was a result of:

  • the borrower’s disregard for financial obligations;
  • the borrower’s inability to manage debt; or
  • extenuating circumstances.

The borrower must provide a letter of explanation with supporting documentation for each outstanding collection account and judgment. The explanation and supporting documentation must be consistent with other credit information in the file.

Applicable to Loans Run Through TOTAL Mortgage Scorecard:

TOTAL Mortgage Scorecard Accept/Approve – There are no documentation or letter of explanation requirements for loans with collection accounts or judgments run through TOTAL Mortgage Scorecard receiving an “Accept/Approve” despite the presence of collection accounts or judgments. These accounts have been already taken into consideration in the borrower’s credit score. If TOTAL Mortgage Scorecard generates a “Refer,” the lender must manually underwrite the loan in accordance with the guidance above applicable to manually underwritten loans with collection accounts and judgments.”

As you can see, FHA loan rules take judgments, delinquencies and other negative credit information very seriously. However, there is some lattitude given when it comes to paying off collections. According to the mortgagee letter, “FHA does not require collection accounts to be paid off as a condition of mortgage approval. However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the borrower’s ability to repay the mortgage.”

“To mitigate this risk, FHA is requiring a capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000…If the total outstanding balance of all collection accounts for all borrowers is equal to or greater than $2,000, the lender must perform a capacity analysis as detailed below. Unless excluded under state law, collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance.”

Do you have questions about FHA loan rules? Ask us in the comments section.

31 Responses to FHA Updates Loan Rules On Credit, Collections, and Judgments

  1. Lisa cutshaw says:

    I have heard that FHA has changed or is changing the wait time after a short sale to one year. Is this correct?

    • Joe Wallace says:

      If you were current on your mortgage payments at the time of the short sale you may be able to work with a lender to begin applying for a new FHA mortgage depending on the lender’s standards. If you were delinquent on mortgage payments at the time of the short sale, the wait time would likely be a minimum of 12 months from the last late payment.

  2. Ryhan Carrier says:

    So if I have collections totally 5000, but 90% is medical, would I be able to get a loan with a credit score around 620?

  3. Niki says:

    So is your credit score more important or what is already on your credit?

    • Joe Wallace says:

      Both are considered very important issues. If you don’t have a clean payment history for at least 12 months before your loan application, you may hurt your chances at loan approval.

  4. Donna says:

    What is a capacity analysis?

  5. Jennifer says:

    My husband and I both have credit scores of 628 and 635, and no late payments on any current accounts for over 1 year. Our mortgage broker told us in order to qualify for the 3.5% down we have to have a credit score of over 660 to qualify for FHA. Is this true? and if it is, do we qualify for any other FHA loan? It has been over 4 years since there has been anything derrogative on our credit reports, and the items that are on there from 4 yrs ago or more are due to an economic hardship of losing our business.

    • Joe Wallace says:

      Your lender may require a larger down payment depending on the circumstances of the loan. You may find more competitive terms by shopping around for another lender.

  6. Lori says:

    I have a credit card charge off for $13000 with last payment being 08/10/2010 and a current credit score of 640 (my husband has a score of 725) – would I be able to qualify for an FHA loan?

  7. Zach says:

    I have been working with a mortgage lender and have been pre approved for an FHA loan with my credit scores around 627-635. Assuming everything is as I stated to them, am I pretty much in the clear to be approved for my new mortgage?

    • Joe Wallace says:

      We couldn’t comment on what a lender may or may not do in such cases–it depends on the lender’s qualification standards.

  8. Dalas says:

    I heard it is no longer required to wait three (3) years after a foreclosure before getting an FHA loan, true? Three years will be October 2014 but I’d rather not wait that long, we’d like to get a house July 2014. I am still in Chapter 13 bankruptcy scheduled to be over December 2014. I have been on my job two years, make plenty of money, and have been on time with my chapter 13 payments. I have a credit score of 650 and building. I’ll have about 10% down. Do you think it would be possible to get an FHA loan in July 2014 (3 months before the 3 year mark)?

    • Joe Wallace says:

      Whether the lender is willing to work with you in this situation would be based on individual circumstances. Have you tried applying at (A private website, not a government agency)

  9. Kevin Reese says:

    My wife and I are trying to get a FHA loan. Me as the primary borrower and her as co-applicant. She has lates on her student loans , which have been consiladated and are current for the last 8 months. we provided the lender a letter of explanation, detailing the reason she was late.. (surgery) .. underwriter has made a decision to deny, stating the reason was/is not good enough. Is there anything we can do?

  10. Kevin says:

    When writing a letter of explanation, is it up to the underwriter’s discretion what is acceptable?

  11. John hobbs says:

    I co signed a student loan in 2004 and the student loan went delinquent on February 2008. When will it come off my credit report? And will I be able to apply for a fha loan after it comes off?

    • Staff Writer says:

      To get the answer about when a student loan delinquency might come off a credit report, you’ll need to contact the credit reporting agencies to see what standards may apply. There are three major credit reporting agencies and a potential borrower would need to contact all three. The agencies are Equifax, Experian, and TransUnion. If the derogatory credit information isn’t on your credit report at some point it’s possible you could apply for an FHA loan and get approved depending on your FICO scores and other financial qualifications, but it’s always a good idea to discuss your situation with a lender to see what your options might be.

  12. Kev says:

    We have student loans in a charged off status that we’ve settled with the lender on. They will be paid off in 8 months. I am a co-signer for my son on these and he wants to get a mortgage. The credit union said that he wouldn’t be able to get a mortgage for several years. Is this true or is there a way to show that some effort has been made to work with the lender?

    • Staff Writer says:

      That may depend on lender standards–you would need to discuss the issue with the lender to see what might be possible–ask the lender what might be acceptable in this situation.

  13. Dominick palumbo says:

    We have the right credit score and down payment for the loan but found out I have a judgment from 6 years ago I never knew about nor can I find the person that put it against me what can I do

    • Staff Writer says:

      That may depend on lender standards. You may wish to contact the credit reporting agencies to see if there is further information available that may help you clear up the matter.

  14. Clay says:

    If I have a second mortgage charge off a year old and it reflects as a 0 balance on our credit report can I get an fha loan? We are going through a private lender but wondering if anybody knows anything on the matter?

  15. Joe says:

    If you have a judgement on your credit report, but was able to obtain a partial release from the lien holder and is not on title, would I be able to get a FHA loan approval?

    • Staff Writer says:

      That may depend on a variety of factors including lender standards, so you would need to discuss the situation with the lender to see if that circumstance would be acceptable at that financial institution. Your credit history since the lien and your FICO scores would also play a role in whether the loan is possible. In any case, documentation would be required to prove the lien holder released you from the debt.

  16. Maryellen says:

    if a judgment comes off the credit report after 7 years how does one know if there are outstanding judgments to be addressed

    • Staff Writer says:

      That’s a question best answered by a credit counselor-you can get a referral to a HUD-approved local housing counselor who can help with issues like these by calling 1-800 CALL FHA. There may also be resources available at the governments Consumer Financial Protection Bureau ( That said, it seems logical to assume that if there are still outstanding items that are required to be paid that those would be reflected in the report. If a judgment has been satisfied it seems logical to assume that the satisfied judgment would fall off a credit report after a certain amount of time.

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