FHA Loans With Charge-Offs Mortgage Guidelines
This blog will cover HUD charge-off account guidelines on FHA loans. I get this question asked several times a day: Why do I have to pay a charge-off to qualify for an FHA loan?
Many home buyers who call me every day are told that they are told to pay off all of their charged-off collection accounts by banks and other lenders they go to for them to qualify for FHA loans. This is not true.
Many mortgage loan originators are either incompetent or do not know the HUD 4000.1 FHA Handbook Borrowers do not have to pay off any outstanding unpaid collection accounts and charge-off accounts to qualify for FHA loans. HUD exempts medical collections and charge-off accounts from debt-to-income ratio calculations. In this article, we will discuss and cover the HUD charge-off account guidelines on FHA loans.
Will Charge-Off Accounts Keep Me From Buying House?
Homebuyers can qualify for FHA loans with charge-off accounts. Credit scores will probably fall in the low 500 with recent collections being reported on the credit report. Getting new credit will be challenging, however, consumers can re-establish credit with secured credit cards.
One of the factors in getting an approve/eligible per automated underwriting system is to have been timely on all the monthly debt payments for the past 12 months. You can have prior bad credit, low credit scores, prior late payments older than a year old, collections, and charge-off accounts. But the key in getting an automated findings approval is to have timely payments in the past year.
Recent collections are not viewed as favorable and will plummet credit scores. These credit collection agencies and bill collectors are on commission so phones will be constantly ringing. Collection agencies and bill collectors want to collect their commissions by collecting the outstanding balance of past-due debts.
Collection Agencies and Consumer Rights
Nobody wants to stiff a creditor but there are times in people’s lives when they run into financial hardships. The team at Gustan Cho Associates have helped hundreds of families who have become victims of the financial and real estate collapse of 2008.
Most folks that lost their jobs or had to close their businesses are trying to recover and put food on the table. It is never easy to rebuild and re-establish after an extenuating circumstances such as an extended unemployment, change of jobs, loss of business, loss of income due to divorce, or illness. However, people recover and when they do, they become stronger than ever.
The team at Gustan Cho Associates are experts in helping homebuyers get approved and close on their home mortgage after getting the runaround from a different lender. Over 80% of our homebuyers at Gustan Cho Associates are borrowers who gotten a last-minute mortgage loan denial or could not qualify after being pre-approved due to overlays.
HUD Charge-Off Accounts Guidelines on Medical Versus Non-Medical Collections
Non-medical collection accounts with outstanding balances do not have to be paid to qualify for FHA loans: However, if the outstanding collection account balances of all collection accounts are greater than $2,000, then HUD, the parent of FHA, requires that 5% of the unpaid outstanding collection account balance as a hypothetical monthly debt. The borrower’s debt-to-income ratios calculations consider the 5% outstanding hypothetical debt on all non-medical outstanding unpaid collection accounts.
Suppose 5% of the unpaid outstanding balances of the collection accounts is too high and will disqualify meeting the minimum debt-to-income ratio limits. In that case, the following can be done: The borrower can enter into a written payment agreement with the creditor. Whatever the minimum monthly payment agreement is, that monthly agreement will be used in place of the 5% of the outstanding unpaid collection account balance
There is no minimum payment seasoning required. On the date the written payment agreement is executed, the monthly payment agreement that is agreed upon will go into effect. There is no 3-month seasoning required, like it is for judgments and IRS income tax written payment agreements.
Why Lenders Require Charge-Off Be Paid Off When HUD Charge-Off Account Guidelines Do Not Require It
Why do I have to pay a charge-off to qualify for an FHA loan? This is what banks and mortgage lenders tell many borrowers. This is not an FHA Requirement but may be a mortgage lender overlay. What are mortgage lender overlays? Mortgage lender overlays are additional requirements imposed for borrowers by each lender that surpass HUD’s FHA minimum lending guidelines.
Per HUD charge-off account guidelines, HUD does not require borrowers to pay off outstanding unpaid collection accounts and charge-off accounts. But a mortgage lender may require it.
Those borrowers who are told that they do not qualify for an FHA loan due to having outstanding collection accounts and charge-off accounts DO NOT have to if they find a lender with no overlays on FHA loans. The only way that they will qualify for an FHA loan is by paying off the charge-off accounts and outstanding collection accounts. They need to find a different mortgage lender like myself where we do not have overlays on HUD charge-off account guidelines and outstanding collection accounts.
Do HUD Charge-Off Account Guidelines Mandate Charge-Offs Be Paid?
Homebuyers can qualify for an FHA loan with a second mortgage charge-off account without paying off the second mortgage charge-off account balance. Unfortunately, many loan officers tell borrowers that they must pay off the second mortgage charge-off account. This is the worst mistake Borrowers can ever make because if you pay off the second mortgage charge off the account, that resets the statute of limitations.
The three-year mandatory waiting period to qualify for an FHA loan after a second mortgage charge-off. Under HUD Guidelines on qualifying for an FHA loan after a second mortgage charge off there is no waiting period. Most lenders have overlays of three years from the date of the second mortgage charge-off that is reflected on the borrower’s credit report or the date of the second mortgage charge-off settlement date, whichever is later. Paying off the second mortgage charge off the account will restart the three-year waiting period to qualify for an FHA loan.
If a mortgage lender tells you that you do not qualify for an FHA loan because there is an outstanding balance on your credit report due to the second mortgage charge off the account, they do not know how to read credit reports. I need to explain to the mortgage loan originator that in most charge-off accounts, whether regular consumer charge-off accounts or first or second mortgage charge-off accounts, there is always an outstanding unpaid collection account balance reporting on all charge-off accounts. Unfortunately, many mortgage loan officers still do not know this and are screwing up by telling borrowers to pay off the charge-off accounts where they do not need to.
Homebuyers can qualify for FHA loans with charge-off accounts. However, just because you have a charge-off does not mean creditors cannot go after you. That charge-off can become a judgment. Bankruptcy is the worst nightmare for creditors and bill collectors. Bankruptcy will wipe out any rights to collection efforts, expunge all debts and accounts receivables, and all outstanding judgments will be null and void. Chapter 7 Bankruptcy benefits consumers with no assets, no job or irregular earnings. After filing Chapter 7 Bankruptcy, there will be a meeting of creditors that will be scheduled by the Bankruptcy Trustee. That meeting of creditors, normally no creditors will show up to contest the bankruptcy filing. In 90 days after filing Chapter 7 Bankruptcy, the petitioner will get discharged of all debts.
You can qualify for an FHA loan two years after the discharge date of Chapter 7 Bankruptcy. Bankruptcy is a federal law that enables hard working Americans in debt a fresh start with their financial life. Most all debts can be discharged in bankruptcy with the exemption of fraudulently gotten property, debts to the government, federal delinquent taxes, federal student loans, and other non-exempt debts listed under the U.S. Bankruptcy Courts.
There are alternatives to filing for bankruptcy. Consumers can explore the idea of debt settlement. Debt Settlement is when consumers can settle the debt for a fraction of what they owe them and enter into a payment plan. For example, consumers who owe a creditor $1,000, can see if the creditor will settle the debt for $ 500. Consumers can see if creditors will take $50 per month for ten months with no additional interest.
Statute of Limitations on Collections, Charge-Offs, and Judgments
The final option does not to make any payments and ignore them. Eventually, all of the debts will not be collectible because of the statute of limitations. The statute of limitations varies from state to state. In most states, the statute of limitations is 5 years for most debts like credit cards.
The statute of limitations on credit card debts and charge-off accounts is anywhere between three years to seven years depending on the state. Each state has their own statute of limitations on debts. With judgments, each state has their own statute of limitations on judgments. The shortest statute of limitations on judgment is ten years which are a handful of states including Missouri. However, the creditor has a right to renew the judgment prior to the statute of limitation expires for an additional ten years. Depending on the state, creditors may have renewal rights on judgments more than once. Another handful of states have statute of limitation terms on judgment of twenty years. After the first twenty years, the creditor has a right to renew the judgment multiple terms which each term is 20 years. The bottom line is a bankruptcy will wipe out a judgment or judgments. Or you may want to negotiate with the creditor on a repayment plan.
Consumers who decide to ride out debts until the statute of limitations kicks in, do not make partial payments on any debts. partial payments on debts reactivate the date of the last activity and renew the statute of limitations. Derogatory credit remains on the credit report for 7 years from the date of the last activity. After 2 years, it normally does not have any impact on credit scores, especially if rebuilding credit with secured credit cards or other credit.
Qualifying For FHA Loans With Charge-Off Accounts
Home buyers can qualify for FHA loans with charge-off accounts. Although some mortgage lenders might require borrowers to pay an old bad collection account off, this is not HUD Guidelines but rather FHA Lender Overlays. Homebuyers with open collection accounts and charge-offs needing to qualify for FHA Loan with a lender with no overlays, please contact us at Gustan Cho Associates at 1-800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven day a week, evenings, weekends, and during holidays.
