Housing Down Payment Myths
Housing Down Payment Myths
October 28, 2016
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Open Collections and a New Mortgage

Pay off Outstanding Collections to Qualify for a Mortgage

Borrowers DO NOT have to pay off outstanding collections to qualify for a FHA Mortgage Loan. If there is are any outstanding collections with an open dispute this can be problematic.  Generally Lenders have overlays, an overlay is a more stringent policy above FHA minimum guidelines.  This is legal and most of the mortgage lenders do have overlays. As an example one of the more common is FHA will allow someone to qualify for a mortgage with a 580 FICO score and 3.5% down payment.  However, more commonly lenders require a minimum of 620.  There is some logic behind this example,  if a person has less than a 620 FICO score they maximum allowable back end DTI (debt to income) is 43%,  with FICO scores of 620 or better the maximum allowed DTI is 56.9%, a huge difference.  Therefore many lenders will require old outstanding collections be paid off to qualify for a mortgage but this is not required according to FHA minimum guidelines.

Outstanding Collections – How they are treated

There are guidelines that must be followed when considering outstanding collections. If there are more than $1,000.00 in outstanding collections (non-medical) then the total sum of the collections will be taken into the consideration agains the DTI. (Debt to Income Ratio).  Here is how it works, if a borrower has outstanding collections of more than $1000, 5% must be calculated into the debt. For an example, a borrower has an old outstanding collection of $2,000 so $2,000 X .05 = $100.  Therefore the $100 must be added into the Debt of the borrower just as car payment or credit card payment is.  Maybe the borrower being able to qualify is not affected by the $100 added into their monthly debt obligation but,,,,,what if it were $10,000?   $10,0000 x .05 = $500.  This may be insurmountable and the borrowers may exceed the maximum allowable DTI. In this instance, there is another option before having to pay off the collection.  The borrower can enter into a written payment agreement with the creditor, and whatever the agreed monthly payment is, that figure will be added to DTI in lieu of the 5% of the outstanding collection.  Going back to the example of $10,000 outstanding collection if the borrower were to come to an agreement  (in writing) of paying $100.00 a month then the $100 would be added to the monthly debt and not the $500 (10,000 x .05 = $500)

Collection Accounts and Disputes

What if a borrower disputes old collections accounts?  Anyone has the right to file a dispute regarding an error on a collection report and it is the responsibility of the individual to verify the accuracy of your credit profile.  It stands to reason if you disagree with how a creditor reports a collection you should be allowed to dispute it.  No one wants to accept derogatory credit but again there are strict guidelines on how this is viewed and accepted.  During the mortgage application process an open credit dispute may not kill your new home dreams but it will almost certainly bring it to a slowdown or stall.   Once again, no one says you have to pay off collection accounts , however many people will dispute collection accounts.  This is when choices have to be made, if the collection in question has been disputed it has to either be retracted or paid off.  If the collection is a small amount for less than $100, often a call to the creditor they will accept even a portion of the payment as full payment and remove the item from your credit.  However, more often the old collection is a larger amount and may be not be so simple or it is possible the creditor will not accept any pay to remove agreement.  What then?  You can detract the the dispute and this is often the best route to qualifying for a mortgage for your new home.

Open Collections – Tax Liens, Judgements

Occasionally a judgment may not show up on your credit report but it will come up with the public records search.  Planning ahead can be a crucial role in qualifying for a mortgage. Most every buyer is aware if a they have a judgement or most certainly a tax lien agains filed against them.  How these are handled can determine a borrower from being able to qualify for a FHA Mortgage or not.  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. As you can see if you are planning to qualify for a new mortgage soon plan to succeed and have these things in order for less to worry about.  Failure to plan on your part does not constitute an emergency on someone else’s part.

Many Open Collections, Chargebacks, etc.

None of us came into this world and was promised a clean easy route to life. On the other hand in America the route to home ownership as troublesome as it may seem is far greater opportunity than most other places of the world.  When the mortgage and Real Estate industry collapsed in 2008 millions of Americans felt the pain and millions of them still have scars on their credit and have not known where to to turn.  Then there is pride, stubborn American pride if we ignore it then it will go away.  Never does ignoring a problem make it go away.  The good news is over time individual credit profiles do improve if nothing else derogatory is reported but it could take years.  Credit Repair is an option, and it does work.  One of my partners in this business that has become a big asset is Gene Schwalen (972) 347-4191.  His Credit Repair Service guarantees a 700 FICO score.  There are many Credit Repair Professionals and if you plan on qualifying for a mortgage in the year and have credit challenges I highly recommend you get in contact with Gene Schwalen or someone like him.

The Larry Stepp Team @ Gustan Cho Associates is available 7 days a week, holidays and weekends.  My personal cell phone number is 407-922-4755.

Larry Stepp Team      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 The Larry Stepp Team @ Gustan Cho Associates 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 Gustan Cho Associates Lenders Network, its officers, subsidiaries, parent, or affiliates.

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