October 26, 2021

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Home Loan Credit Problems: Unresolved Borrower Debt

Home Loan Credit Problems: Unresolved Borrower Debt

What can jeopardize a home loan application? There are many factors, but delinquent and unresolved debt are two areas that first-time home buyers should be keenly aware of; these issues can derail a mortgage loan application depending on the severity and amount of the debt.

We discuss debt ratios and related issues in this space all the time; the unresolved debt issue is related to debt ratios in a way (the resolution of the debt will likely add to the debt ratio in some way) but an account that is delinquent, and/or in dispute is a separate area altogether.

It’s always best to apply for any major line of credit with a minimum of 12 months of on-time payments; anything less could threaten your ability to get loan approval.

But if you have a delinquent account and unresolved debt issues, this will be a red flag to the lender if your issues have not been addressed.

That means resolving the debt problem to the satisfaction of the creditor, which may or may not require negotiations between you and the creditor about a repayment plan or debt forgivness.

You won’t be able to get a home loan approved with a delinquent account that has not been resolved. HUD 4000.1, the FHA home loan rulebook for single family mortgage loans, says this about what it calls Disputed Derogatory Credit Accounts:

“Disputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months…If the credit report utilized by TOTAL Mortgage Scorecard indicates that the Borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts, the Mortgage must be downgraded to a Refer and manually underwritten. “

Note that the loan is not automatically terminated at this point, but your lender is going to need some additional information from you to make an informed decision. Certain types of accounts are excluded from this, such as disputed medical bills, disputed charges related to identify theft, etc.

In these cases the lender will need supporting documentation to move forward with the mortgage.

To move forward with a home loan when there disputed accounts like those mentioned above, or when there is delinquent federal debt, and in other cases where FHA loan rules or lender standards require it, the lender may need to see evidence that you are in a satisfactory repayment agreement and that a minimum number of payments are made in order to move forward with the mortgage.

Ask a loan officer if you are not sure about how a disputed account, delinquent account, or other derogatory credit information may affect your loan transaction.

Joe Wallace - Staff Writer

By Joe Wallace

March 21, 2019

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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