Can I get an FHA loan with a collection in my credit history? The answer can be complex since no two credit histories are alike, but there are some general guidelines that can help you understand where you might be in terms of the ability to get a home loan approved even with a collection in your credit record.
It should be understood that what follows are the FHA guidelines for the loan approval process in terms of dealing with a credit issue; lender standards may also apply (and often do) above and beyond these rules.
HUD 4000.1 has the rules for lender requirements when processing a loan with collections in the borrower’s credit history. The rules start out by describing what the FHA considers a “collection”.
“A Collection Account refers to a Borrower’s loan or debt that has been submitted to a collection agency by a creditor.”
According to HUD 4000.1, in situations where the borrower’s credit reports show “cumulative outstanding collection account balances of $2,000 or greater”, the lender is required to do the following:
-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 Borrower’s 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.
Those are direct quotes from HUD 4000.1. The information above doesn’t address what happens if there is a non-borrowing spouse with collection accounts in states where community property laws factor into the mortgage loan application.
That’s an important issue, since state community property laws may dictate that the spouses financial liabilities and other factors be considered in a major line of credit. In such cases, HUD 4000.1 instructs the lender:
“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 Borrower’s ability to pay all collection accounts, unless excluded by state law.”
The lender’s required documentation for collection accounts includes the following:
The Mortgagee must 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.
Furthermore, HUD 4000.1 says that if a lender uses five percent of the outstanding balance, no further documentation is needed. Again, lender standards and additional requirements may apply beyond these FHA loan minimum requirements.
Speak to a loan officer if you aren’t sure how these rules may affect your transaction.