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FHA Loans Credit Issues: Charge-Offs and Disputed Accounts

February 22, 2016

109There are many questions about FHA loan credit requirements. Some credit issues involve lender requirements which may go above and beyond FHA loan program minimums.

Other issues involve FHA loan guidelines themselves-for example, the basic FHA policies toward charge-offs and disputed accounts on a credit report. How is the lender instructed to deal with these issues when processing an FHA loan application insofar as FHA loan minimum standards are concerned?

HUD 4000.1 has the answers–we start with a look at the FHA definition of “charge-offs”, which the rule book defines as, “a Borrowers loan or debt that has been written off by the creditor”. If a lender encounters charge-offs in the borrower’s credit history, he or she must determine if the charge-off(s) happened due to one of the following:

–the Borrowers disregard for financial obligations
–the Borrowers inability to manage debt; or
–extenuating circumstances

What’s more, the lender is responsible for obtaining supporting documentation:

“The Mortgagee must document reasons for approving a Mortgage when the Borrower has any Charge Off Accounts. The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding Charge Off Account. The explanation and supporting documentation must be consistent with other credit information in the file.”

For disputed accounts, HUD 4000.1 begins with a definition of the term:

“Disputed Derogatory Credit Account refers to disputed Charge Off Accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months.”

In cases where a disputed account appears in the borrower’s credit history, the lender is required to “analyze the documentation provided for consistency with other credit information to determine if the derogatory credit account should be considered in the underwriting analysis.”

Some disputed accounts can be excluded from consideration or analysis in these cases, including “disputed medical accounts; and disputed derogatory credit resulting from identity theft, credit card theft or unauthorized use provided the Mortgagee includes a copy of the police report or other documentation from the creditor to support the status of the account in the mortgage file.”

And what does HUD 4000.1 say about required supporting documentation in these situations? “If the credit report indicates that the Borrower is disputing derogatory credit accounts, the Borrower must provide a letter of explanation and documentation supporting the basis of the dispute.”

This section also adds, “If the disputed derogatory credit resulted from identity theft, credit card theft or unauthorized use balances, the Mortgagee must obtain a copy of the police report or other documentation from the creditor to support the status of the accounts.”

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Joe Wallace - Staff Writer

By Joe Wallace

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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