October 24, 2021

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FHA Loan Rules For Income and Debt Calculation: Collections

2015-13FHA loan rules cover a lot of ground when it comes to a borrower’s creditworthiness. There are minimum FICO score requirements, instructions to the lender for reviewing the borrower’s record on-time payments (12 months of reliable payments on all financial obligations is strongly recommended), and much more.

One area that is also covered in HUD 4000.1 is what the lender should do if collections are included in borrower’s credit history.

The presence of a collection action on a loan applicant’s record may be cause for concern, but there are instructions to the lender on how to view collection accounts and what to do if those collections fall within the lender’s “tolerance” for loan approval. What will the lender require under FHA loan rules if the loan can move forward?

HUD 4000.1 page 183 begins by defining what it views as a “collections account”:

“A Collection Account refers to a Borrowers loan or debt that has been submitted to a collection agency by a creditor.” In cases where such an account is present the lender is instructed as follows:

“If the credit reports used in the TOTAL Mortgage Scorecard analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must:

–verify that the debt is paid in full at the time of or prior to settlement using acceptable sources of funds;
–verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrowers Debt To Income (DTI); or
–if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrowers DTI.”

There are also rules for the lender about collection accounts on a non-borrowing spouse’s record in “community property” states where state law may have a say in how a legally married couple’s joint debts are viewed or handled in the eyes of the law:

“Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrowers ability to pay all collection accounts, unless excluded by state law.”

In cases where collections accounts are present, the lender is required to provide the following documentation:

–evidence of payment in full, if paid prior to settlement;
–the payoff statement, if paid at settlement; or
–the payment arrangement with creditor, if not paid prior to or at settlement.

If the Mortgagee uses 5 percent of the outstanding balance, no documentation is required.”

If you aren’t sure how these rules may apply in your situation, discuss your needs or concerns with a loan officer to see what that financial institution may require in such cases.

Do you work in residential real estate? You should know about the free tool offered by FHA.com. It is designed especially for real estate websites; a widget that displays FHA loan limits for the counties serviced by those sites. It is simple to spend a few seconds customizing the state, counties, and widget size for the tool; you can copy the code and paste it into your website with ease. Get yours today:


Joe Wallace - Staff Writer

By Joe Wallace

March 30, 2016

Joe Wallace has been specializing in military and personal finance topics since 1995. His work has appeared on Air Force Television News, The Pentagon Channel, ABC and a variety of print and online publications. He is a 13-year Air Force veteran and a member of the Air Force Public Affairs Alumni Association. He was Managing editor for www.valoans.com for (8) years and is currently the Associate Editor for FHANewsblog.com.

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