Can I Qualify For FHA Loan With Collections

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Can I Qualify For FHA Loan With Collections

Can I Qualify For FHA Loan With Collections

This Article On Can I Qualify For FHA Loan With Collections Was Written By Rashad Carmichael NMLS 1453799

FHA Loans are the most popular home loan program in the United States. FHA is not a lender. FHA is part of the United States Department of Housing and Urban Development, known by many as HUD, and HUD has created the Federal Housing Administration to insure private lenders such as banks and mortgage companies against borrower defaulting on their home loans and the property going into foreclosure. Mortgage lenders will lend on a loan collateralized by a property only if there is equity in the property itself. For example, most mortgage lenders will want the home buyer to have skin in the game by requiring the borrower to put at least 20% down payment. In the event if the borrower defaults on his or her obligations in paying the mortgage payments, the bank can proceed with foreclosure proceedings and will mostly recover most of the balance of the property loan because the property owner has 20% equity. If the property owner did not have any equity in the property, the lender will most likely take a loss if the lender forecloses because  the bank will not want to take its time in getting top dollar for the property and will want to sell it fast whether it is via sheriff’s auction or REO. This process takes money and time and foreclosure properties normally sell below market value. With FHA Loans, a home buyer can purchase a home with 3.5% down payment with a 580 FICO credit score. FHA also has very lenient credit standards where a home buyer with prior bad credit, low credit scores, and outstanding collection accounts can qualify for a FHA Loan with a low interest rate. Lenders will normally not grant a home loan with very low interest rate to a borrower with low credit scores, little down payment, and outstanding collection accounts. However, since FHA will guarantee the lender in the event if the borrower defaults on a FHA Loan, many lenders are more than willing to extend credit to borrowers via FHA Loans.

How Does FHA Categorize Collections

Borrowers who have outstanding collection accounts and charge off accounts do not have to pay off their unpaid collection balances in order to qualify for a FHA Loan under HUD 4000.1 FHA Handbook , which is the latest rules and regulations of FHA Guidelines . So the answer to the question of Can I Qualify For FHA Loan With Collections is yes. However, FHA does have certain requirements on how lenders need to treat borrowers with outstanding collection accounts.

FHA categorizes collections into three different categories.

  1. Non-Medical Collection Accounts
  2. Charge Off Accounts
  3. Medical Collection Accounts

Many borrowers often get confused when they go to a lender to get pre-approved with outstanding collection accounts. They are often told that they do not qualify for a FHA Loan until they pay off all of their outstanding collection accounts and charge off accounts even though HUD states that a FHA Borrower does not have to pay off outstanding collections and charge offs. The reason they are told they do not qualify for a FHA Loan unless their collections and charge offs are satisfied is because lenders can have additional guidelines and their own requirements that are higher standards than those of FHA. These additional requirements is called FHA Lender Overlays . If you are told that you do not qualify for a FHA Loan by a bank or mortgage lender unless you pay off your outstanding collection accounts and charge off accounts, you can contact us at The Rashad Carmichael Team at 773-505-4710 or email Rashad Carmichael at rashad.carmichael@phmc.com .

How Collection Accounts Affect Debt To Income Ratios

Non-Medical collection accounts with unpaid balances on them can affect borrowers when a lender is calculating their debt to income ratios. If a borrower has more than $2,000 in outstanding collection accounts, the lender is required to take 5% of the outstanding collection balance and use it towards the calculations of their debt to income ratios. The borrower does not have to pay anything and this 5% figure is just a paper figure used as if it were a monthly debt. If the borrower has a high outstanding balance on their collection accounts and the 5% of the outstanding balance will disqualify the borrower because it will exceed the maximum debt to income ratio cap, the borrower can get a written payment agreement with the creditor and/or collection agency and whatever amount that is agreed on the written payment agreement will be used in lieu of the 5% of the outstanding collection account balance.

Medical collection accounts and charge off accounts are exempt from debt to income ratio calculations.

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