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Housing Act of 1937 – First Cabinet Position HUD – 1965

First HUD Secretary 1966 was Robert Weaver

Can a borrower obtain a mortgage loan with a unpaid collection account or charge off account or even a tax lien or judgement in their credit file?  The short answer is “yes” but allow me to give you a quick history.  The United States Department of Housing and Urban Development (HUD) has roots in America all the way back to 1937 with the U.S. Housing Act, but it was not until 1965 with the passage of Department of Housing and Urban Development Act a cabinet position was created.  On January 18, 1966 Robert Weaver became the first HUD Secretary.  Since 1966 HUD has a rich history of assisting millions of people into adequate and safe housing.

FHA is the most popular Loan program

Today HUD is the parent of Federal Housing Administration (FHA).  FHA is the most popular mortgage loan program available to home buyers, especially first time home buyers and mortgage loan borrowers with bad credit.  FHA is not a mortgage Lender, FHA is a government entity whose primary responsibility is to guarantee FHA Loans that are originated and funded by FHA approved private banks and mortgage lenders.  FHA Loans are especially attractive to first time home buyers and mortgage loan borrowers with bad credit because FHA Loans are much more lenient on credit scores, income requirements and debt to income ratios.  The HUD 4000.1 FHA Handbook is the official handbook that outlines all of the FHA mortgage lending guidelines.  This handbook will list all the requirements in qualifying for a FHA Loan with Tax Lien and other derogatory collections and credit items. All loans must be funded or originated by approved FHA /HUD approved banks or lenders and they must follow FHA Guidelines in order for the FHA Loans they originate to be insured in the event the borrower defaults on their FHA Loan. A FHA Loan only requires 3.5% down payment on home purchase and the borrower must meet a minimum 580 FICO credit score.  A borrower can still qualify for a FHA loan with credit scores between 500 and 579 as long as they can put down 10% down payment on their home purchase.  A FHA borrower can have a maximum of 56.9 % debt to income ratio provided the borrower have at least a 620 FICO credit score. FHA borrowers with a FICO credit score below 620 will need to have debt to income ratios that do not exceed 43% DTI.  FHA allows home buyers with a Chapter 7 Bankruptcy to qualify for a FHA Loan as long at the Chapter 7 Bankruptcy discharged date is at least 2 years previous. FHA allows borrowers with a prior foreclosure, deed in lieu of foreclosure, and short sale to qualify for a FHA Loan if the foreclosure, deed in lieu of foreclosure, or short sale was at least 3 years previous.   According to FHA Guidelines there is no waiting period after Chapter 13 Bankruptcy Discharge but if it has been less than 2 years previous, the the file needs to be a manual underwriting.

Summary of a few Minimum Guidelines:

  • Can qualify for a FHA loan with a FICO Score 500-579 with at least 10% down payment
  • Can qualify for a FHA loan with 3.5% down payment with a minimum FICO of 580
  • FHA borrower can have a debt to income ratio up to 56.9% provided borrower has a minimum FICO of 620
  • FHA borrowers with less than 620 FICO score can have up to 43% debt to income ratio
  • Can qualify for a FHA loan with a Chapter 7 Bankruptcy as long as the discharged date is 2 years seasoned
  • Can qualify for a FHA loan with a prior foreclosure, deed in lieu of foreclosure or short sale it there is as least 3 years seasoned
  • No Waiting (Seasoning) period after Chapter 13 Bankruptcy Discharge but if it was less than 2 years previous the file will need to be a manual underwriting.

FHA Loans and a Collection Account

FHA guidelines have 3 categories for collection account

  1. Non Medical Collection Account
  2. Medical Collection Account
  3. Charge off Account

According to HUD 4000.1 FHA Handbook FHA will not require FHA borrowers to pay off outstanding collection accounts or charge off accounts.  However, outstanding collection accounts with outstanding credit balances could affect the borrower’s debt to income ratios.

Non-Medical Collection – a borrower is allowed up to a total of $2,000 in outstanding unpaid collection account before it affects the debt to income ratios of the borrower.  Any outstanding unpaid collection account balance exceeding $2000 balance, 5% of the outstanding unpaid balance will be used as a monthly debt obligation of the FHA borrower even if the borrower does not make any payments.   For example: 2000 x .05 = 100.  Therefore $100 will be counted as monthly debt. If the outstanding unpaid collection balance is large this has potential to exceed the 56.9% of Debt to Income ratio disqualifying the mortgage applicant.  However if this happen and the borrower’s debt to income ratio is too high then the borrower can enter into a written payment agreement with the creditor.  Whatever is agreed upon payment agreement, that figure will be used in lieu of the 5% of the outstanding collection account.

 

FHA does not require medical collection accounts and charge off accounts with outstanding collection balances to have a percentage of the outstanding account balances to be included in the calculations of the borrower’s debt to income ratios no matter how much the outstanding collection account balances are.

What about those Darn Tax Lien or Judgements ?

Not only is seeing a tax lien or judgement on your personal credit profile to say the least hurtful to pride and frustrating because often at that point there are so few options to get them removed and if you need to involve legal it can be very expensive.  The sad part is due to the size and scale of the Bureaucracy mistaken tax liens or judgements are filed.   Then to add insult to injury a tax lien or judgement is the worst thing you can have on your credit report.   Here is the good news !!  FHA allows a borrower to qualify for a FHA loan as long as there is a written payment agreement with the IRS and/or judgement creditor or collection agency.  A borrower can qualify for a FHA Loan with a tax lien or judgment without having to pay them off in full as long as there is a written payment agreement with the Internal Revenue Service/or Judgement Creditor providing the borrower has made three consecutive payments to them and can provide three months of canceled checks. The borrower must have at least three months seasoning and cannot pre-pay/pay the payments in advance.  The three months must have passed.

Summary:

A borrower can qualify for an FHA loan with unpaid collections, unpaid charge offs and even a tax lien.  A borrower can qualify with a minimum FICO score of 500-579 with at least 10% down payment. A borrower can qualify for a FHA loan with only 3.5% down payment with a minimum FICO score of 580.  All FHA minimum guidelines must be met and originated through a HUD/FHA approved bank or lender.  There are no short cuts and if any of these conditions apply then it may take a little more time to be qualified but no less the goal is home ownership.  The Larry Stepp Team at the Money Store and partners with Gustan Cho Associates can direct and guide a borrower through these challenges.  We do not have any overlays, if you meet FHA minimum guidelines we can make your American Dream come true.  I am available 7 days a week, holidays and weekends.

 

Larry Stepp     407-922-4755     LarryS.HomesNetwork@gmail.com

The information contained on HomesNetwork.org website is for informational purposes only and is not an advertisement for products offered by Loan Cabin or its affiliates. The views and opinions expressed herein are those of the author and/or guest writers of Gustan Cho Associates and do not reflect the policy of GCA, its officers, subsidiaries, parent, or affiliates.

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