December 12, 2017

Vimeo Channel YouTube Channel

Do I Have To Pay Off Collection Accounts To Qualify For An FHA Home Loan?

Do I have to pay off collection accounts to qualify for an FHA home loan?

Do I have to pay off collection accounts to qualify for an FHA home loan? That’s a question on the mind of anyone who has a collection agency action in their credit history. What does the FHA have to say about this issue?

On the FHA official site, there is a Frequently Asked Questions section that directly addresses this potential problem for loan applicants nervous about issues in their credit report. It begins with a definition of the phrase “collection account”:

“A Collection Account refers to a Borrower’s loan or debt that has been submitted to a collection agency by a creditor.”

FHA loan rules address collection accounts in the amount of $2000 or more:

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

-verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds;

-verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s Debt-to-Income ratio (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 Borrower’s DTI.”

Note that the lender is required to take action when the collection accounts are $2000 or more “cumulatively”. The total balance of the collection accounts will be an important factor.

Regardless of the outcome of the lender’s action on the above, FHA loan rules also require supporting documentation to justify approving the mortgage loan when there are collection accounts present in the applicant’s credit history. According to the FHA official site:

“The lender must document reasons for approving a mortgage when the Borrower has any collection accounts.”

That’s not all-the applicant will also be required to provide additional documentation. “The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file. ”

Speak to your loan officer to learn what lender standards may be in this area. You may find lender standards to be higher or more demanding than FHA loan program minimum requirements, and standards may vary depending on the lender.

Joe Wallace - Staff Writer

By Joe Wallace

October 4, 2017

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 for over (3) years.

Connect with Joe:

 

Browse by date:

About FHANewsBlog.com
FHANewsBlog.com was launched in 2010 by seasoned mortgage professionals wanting to educate homebuyers about the guidelines for FHA insured mortgage loans. Popular FHA topics include credit requirements, FHA loan limits, mortgage insurance premiums, closing costs and many more. The authors have written thousands of blogs specific to FHA mortgages and the site has substantially increased readership over the years and has become known for its “FHA News and Views”.

5850 San Felipe Suite #500, Houston, TX 77057 281-398-6111.
FHANewsBlog.com is privately funded and is not a government agency.

Share This