Home Loan With Mortgage Charge Off

Home Loan With Mortgage Charge Off Lending Guidelines

ByGustan Cho
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This BLOG On Home Loan With Mortgage Charge Off Lending Guidelines Was UPDATED And PUBLISHED On August 14th, 2019

Home Loan With Mortgage Charge Off:

The United States Department Of Housing And Urban Development (HUD), the parent of FHA, has the most lenient mortgage guidelines when it comes to qualifying for a home loan with mortgage charge off.

  • Home Buyers can now qualify for a home loan with mortgage charge off
  • There is no waiting period to qualify for FHA Home Loan With Second Mortgage Charge Offs IF there is no lien on a property
  • However, if a second mortgage lender charges off a HELOC or other second mortgage and consumer still owns the property, there will be a lien on the property by a second position lien holder
  • This is often the case even though the debt has been charged off
  • The charge off will need to be paid either before or at closing

In this article, we will cover and discuss Home Loan With Mortgage Charge Off Lending Guidelines,

Mortgage Charge Off Lending Guidelines

However, there are strict rules and regulations in qualifying for a home loan with mortgage charge off with waiting period requirements:

  • Under HUD’s FHA Guidelines, borrowers do not have to pay off collection accounts and charge off accounts with the outstanding balance

HUD, the parent of FHA, categorizes collection accounts into two categories:

  • Medical Collections
  • Non-Medical Collections

How Lenders Treat Derogatory Tradelines

Charge off accounts and medical collection accounts are treated the same:

  • Both of these two types of derogatory accounts are exempt from debt to income calculations
  • This is no matter how much the outstanding balance is
  • However, with non-medical outstanding collections with over $2,000 in outstanding balances, FHA requires that 5% of outstanding balance needs to be calculated as hypothetical monthly debt in DTI Calculations

Borrowers can have credit disputes on medical collections non-medical collection accounts with zero outstanding balances:

Credit Disputes Mortgage Guidelines

Borrowers are allowed to have credit disputes on non-medical outstanding collection accounts up to a total aggregate amount up to $1,000:

  • Any amounts over the aggregate $1,000 in total outstanding non-medical collection balance need to have the credit disputes retracted for the mortgage application process to proceed
  • Otherwise, the loan file needs to be downgraded to a manual underwrite
  • One risk with retracting disputes is once it is retracted, credit scores will drop
  • May no longer qualify for a home loan if it drops below the minimum credit score requirements
  • As mentioned earlier,  FHA allows credit disputes on medical collections no matter of the amount

However, cannot have credit disputes on charged offs and non-medical collection accounts.

Mortgage Waiting Period Guidelines

HUD Waiting Period Guidelines are as follows:

  • Two year waiting period after Chapter 7 Bankruptcy discharged date to qualify for FHA and VA Loans
  • Home Buyers can qualify for FHA and VA Home Loans one year into a Chapter 13 Bankruptcy Repayment Plan
  • There is no waiting period requirement after Chapter 13 Bankruptcy discharged date on FHA and VA Home Loans
  • There is a three-year waiting period to qualify for FHA Loans after housing event (foreclosure, deed in lieu of foreclosure, short sale)
  • The U.S. Department Of Veteran Affairs (VA) requires a two year waiting period after housing event
  • Charge off accounts on second mortgages or mortgages are treated differently than regular charge off accounts

The waiting periods for a home loan after mortgage charge off is similar to all mortgage programs.

HUD Guidelines On Mortgage Charge Offs

HUD’s mortgage guidelines in qualifying for a home loan after mortgage charge off is the following:

  • No waiting period in qualifying for a home loan with mortgage charge off IF there is no lien on a property
  • Three years from the date of the charge off account reported on the borrower’s credit report if there is a lien on a property
  • The rules are the same for a primary mortgage as well as second mortgage charge off accounts

Fannie Mae and Freddie Mac have a mandatory 7-year waiting period to qualify for a conventional home loan after mortgage charge off.

What Does A Charge Off Account Mean?

Consumers with a charge off do not mean they are relieved of the outstanding debt:

  • A charge off means that the lender, whether it is a first position lender and/or second mortgage lender, has written off the debt off their books and deemed it as uncollectible debt
  • If the consumer owns a property and the lender wrote off a second mortgage as a charge off, then the property will have a lien from the second mortgage
  • The lender who charged off the debt can always try to collect the debt until the statute of limitations has expired

It is extremely rare that creditors who charge off consumer debt, including mortgage charge offs, will go after bad debt as time passes.

How Does Charge Off Report On Credit Report

Most charged-off accounts report with a balance with it on consumer’s credit report, including second mortgages, do not have to be paid off.

  • Many loan officers do not realize outstanding collection/charged offs do not have to be paid off including second mortgage charge offs
  • They normally tell their clients they do not qualify unless they get a zero balance statement
  • No lender will issue a statement and/or letter to a consumer with a charged-off the mortgage that consumers are no longer liable
  • Again, if loan officers do not qualify borrowers for home loan with mortgage charge off due to the outstanding balance on the credit report, they are wrong and get a second opinion

Or have the mortgage loan officer to contact me at 800-900-8569 and I can educate them on the FHA guidelines and give them case scenario examples.

  • There are lenders who will not approve a home loan with mortgage charge off
  • This is not because of FHA guidelines, but because of their mortgage lender overlays
  • Lender overlays are additional lending guidelines the individual lender sets on top of the federal minimum lending guidelines
  • Lenders are not required to just go with the minimum FHA or Conventional Mortgage Lending Guidelines
  • They can set higher standards

Home Buyers who are told they do not qualify for a home loan with mortgage charge off or other overlays by a lender, please contact us at Gustan Cho Associates at 800-900-8569 or text us for faster response. We are national direct lenders with no overlays on government and conventional loans and can help borrowers secure a home loan with mortgage charge off accounts. We are available 7 days a week, evenings, as well weekends and holidays. You can also email us at gcho@gustancho.com.

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