Collections are credit accounts that have not been paid over a period of time. FHA defines collection accounts as “a Borrower’s loan or debt that has been submitted to a collection agency by a creditor”. When applying for a home loan, collections play a key part in whether or not your mortgage will be approved. Collections are handled differently by FHA and Fannie/Freddie conventional mortgage lenders.
FHA lenders are bound by specific collection guidelines.
- If collections appear on your tri-merge mortgage factual data credit report and total less than two thousand dollars, FHA will not count them against your DTI (debt to income ratio).
- If the total amount of your collections exceeds two thousand dollars, five percent of the total is counted against your DTI. (i.e. $5,000 in total collections would add a $250 monthly payment to your DTI).
- One way to lower the $250 hit to your DTI would be to work out a payment plan with the collection agent with a low monthly payment.
- FHA does not count “charge offs” or “medical collections” in the DTI calculation.
- If you have a civil judgment or tax lien these either must be paid or a payment plan set up. Once three payments are made those payments can be included in your DTI.
While FHA guidelines do not require collections to be paid, most conventional loan programs do.
- All unpaid collections and charge offs have to be paid at or prior to closing a conventional home loan.
- Federal and State tax liens and civil judgments have to be paid.
- Conventional home loans are dependent on AUS underwriting findings (automatic Underwriting Systems).
- Loan Prospector or LP for Freddie Mac and Desktop Underwriter or DU for Fannie Mae. The AUS findings will tell you if your collections need to be paid.
- A good rule of thumb is Collection accounts under $250 or less or a total unpaid balance of $1,000 or less may be exempt.
Collections, Charge offs, Civil Judgments, State and Federal Tax Liens can all have a large effect on your access to credit. If any of these credit issues apply to you. Pull your free credit report from freecreditreport.com. Get an understanding exactly what your personal credit profile looks like and take steps to understand and resolve any outstanding issues. IMPORTANT NOTE TO READER: Knowing what is the permitted “aggregate” amount of disputed collection accounts for your specific loan program can be of vital importance to you and getting your loan approved! Contact us directly if you would like to know more.