Mortgage With Collection Accounts Lending Guidelines

In this article, we will cover and discuss qualifying for a mortgage with collection accounts. If you are a longtime reader of Gustan Cho Associates Inc, you are more than likely familiar with collection accounts. In this blog, we will detail how a collection account will affect your mortgage qualifications. We will also discuss how to apply for a mortgage with collection accounts.

Having large outstanding collections can affect your debt-to-income ratio when qualifying for a loan. Many mortgage borrowers have delinquent accounts on their credit reports and still qualify for a mortgage loan with our team. In the following paragraphs, we will be going over how you can qualify for a mortgage with collection accounts and the lending guidelines.

Can You Qualify For a Mortgage With Collection Accounts?

What is a collection? If you are a hobbyist such as a card collector, stamp collector, or coin collector, a collection may sound like a good thing. However, when it comes to mortgage lending and credit reporting, a collection is the exact opposite. A collection is a highly derogatory item on your credit report. When a debt goes unpaid for a long period of time, the creditor may send your debt to a collection agency. When this happens, you are still legally obligated to pay your debt. When this occurs, there will be a negative impact on your credit rating.  Another important note is you cannot have credit disputes on non-medical collections and derogatory credit tradelines.

How Long Does It Take For a Past Due Account To Go In Collections?

When an account is a past due, typically it is sent to a collection agency which can create quite a bit of confusion for the consumer. Since you have fallen behind on your payments, the lender or creditor usually sells your debt to a collection agency or a debt buyer. This will occur within a few months after you become delinquent. Technically, a lender or creditor should notify you before sending your account to a collection agency.

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When Does a Collection Agency Start Calling Past Due Consumers?

Once your account is sold to a collection agency or debt buyer, they will then try to collect the funds from you directly. They are now the debt holders. Since you are still legally obligated to pay the debt, you may enter into a payment agreement with the collection agency or debt buyer, and not the original creditor. At this point, the original creditor has sold the debt and they are unable to collect the amount owed.

We already know a collection account is derogatory, but what impact will it have on your credit score? Depending on the collection agency or debt buyer, this information will be reported to the credit bureaus. Typically a collection is reported to all three credit bureaus, Equifax, Experian, and Trans Union.

When Are Collection Accounts Reported To The Credit Bureaus?

When a collection is reported to the credit bureaus, you will see a significant negative impact on your credit score. Depending on the type of collection, and dollar amount of the collection, the negative impact can vary. For example, a collection for a large personal loan of $5000 will have a more significant impact than a $100 cable company collection. The higher number of accounts you have in collection status can also increase the negative impact on your scores. 

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How Long Do Collection Accounts Remain on Credit Reports?

Once your account does enter into collections status, this negative information can remain on your credit report for up to seven years. This timeframe starts from the original date you missed your first payment to the original creditor. Since Gustan Cho Associates specialize in helping clients with unique credit scenarios, we have seen collection accounts remain on the credit report for well over seven years. Typically when a collection agency or debt buyer obtains your collection, this clock can restart. Getting collection accounts removed from your credit report can be an uphill battle. 

Can You Qualify For a Mortgage With Medical Collections?

You can qualify for a mortgage with collection accounts like medical collections without having to pay the outstanding balance. Many mortgage lenders often ignore medical collections. By ignoring them, they treat medical collections like it does not exist. However, other lenders with lender overlays may treat medical collections like non-medical collections and can affect your mortgage loan approval.

Medical collections are treated differently than non-medical collection accounts. Medical collections are a touchy subject. The consumer financial protection bureau estimates that one and five Americans currently have medical debt. 

Medical versus Non-Medical Collections

They also estimate over half of all collections accounts are medical collections. The stats on medical collections are absolutely alarming. A study published in 2022 showed over 22 million Americans have a medical debt of at least $250, and over 3 million Americans owe more than $10,000 in medical collections. What is even more frustrating is that many Americans find that their medical debt is sent to collections even though they are paying a monthly payment.

How To Avoid Your Account Going To Collection Status?

If possible, you do not want to apply for a mortgage with collection accounts. However, Gustan Cho Associates are experts in helping borrowers get approved for a mortgage with collection accounts.

If you are on a monthly payment agreement, you need to make sure you have an important talk with your medical provider to make sure your payment plan will not be sent to collections. Unfortunately, the healthcare system in America is all over the place. It is estimated that two out of three Americans who have health insurance have no idea how to use their medical insurance benefits.

More importantly, even though you pay for medical insurance, that does not cover all medical costs. Your insurance provider will only pay a portion of your medical bills, and you are financially responsible for the other portion.

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Medical Collections Erroneously Reporting on Credit Bureaus

If you are a veteran, you know how frustrating the VA medical system can be. Many disabled veterans still have medical collections on their credit reports, even though their medical costs should be paid for. For a little positive news, medical collections will not hinder you from qualifying for a mortgage.

A medical collection does not have a seasoning requirement for mortgage programs such as conventional, FHA, VA, and USDA. Although a medical collection will have a direct impact on your overall credit score, there is no time frame after a medical collection before you may qualify. A mortgage lender does not count a monthly obligation for medical debt against your overall debt-to-income ratio.

Can I Qualify For a Mortgage With Charged-Off Accounts?

Charge Offs. Many of our readers are confused between a collection account and a charged-off account. Typically a creditor will first send your debt to a collection agency. If the collection agency fails to collect on the debt, they will eventually charge the account off. Meaning they have written this amount off of their books and are no longer banking on collecting the amount owed. Technically, you are still financially obligated to pay that debt.

There is no specific time frame where a creditor will send your debt to charge-off status. The good news with a charged-off account with Gustan Cho Associates is, that we do not have to hold a monthly obligation against you if the account is officially charged off. Depending on when the account is charged off, Gustan Cho Associates does not have any overlays surrounding charged-off accounts.

Many times we are able to qualify you for a mortgage even though you have delinquent charged-off accounts reporting on your credit report. For more information on qualifying with charges reporting, please contact us.

Mortgage Guidelines on Student Loans In Collections

If you have a student loan that is currently in collections status, obtaining a mortgage will be next to impossible. You will need to contact the student loan lienholder and get your student loan back in good standing before qualifying for a mortgage loan. Depending on the mortgage program you plan on using, this can take anywhere between 3 and 12 months.

How To Qualify For a Mortgage With Student Loan Accounts in Collections?

You will need to consistently make on-time payments before qualifying for a mortgage loan. Student loan debt is very tricky and cannot be included if you file for bankruptcy. So, student loan debt will continue to haunt you and it is a good idea to restore your student loan debt and start paying it back. We have seen instances where student loan debt does not report on your credit report but will show up on the CAIVRS list (Credit Alert Interactive Voice Response System).

Can You Qualify For a Mortgage With Federal Debts in Collections?

When obtaining a mortgage, you must not have federal debt that is showing delinquency. The CAIVRS  verification is completed during the underwriting process. If you feel you may have student loans in collection status that are not on your credit report, it is important to be straightforward with your loan officer.

Should I Pay Collection Accounts To Qualify For a Mortgage?

Should you pay your collection accounts? The short answer is yes, legally you are responsible for that debt so you should pay it. However, if you are in the process of obtaining a mortgage or plan on applying for a mortgage in the near future, it may not be in your best interest to pay a collection account. The reason we say this is, that there are times when you pay a collection it will have a negative impact on your credit score.

Believe it or not, sometimes when you pay a collection account, it resurfaces with a recent collection date on your credit report. Even though the account is paid in full, the data has a fresh reporting date which can lower your credit score. Unless the account needs to be paid off for debt-to-income purposes, we usually recommend you hold off on paying a collection account until the mortgage loan is closed.

How Can You Qualify For A Mortgage With Collection Accounts?

Since Gustan Cho Associates operates on a no mortgage overlay platform, we are able to help our clients even if you have collections reporting on your credit report. The main qualification hurdle for collection accounts is seasoning requirements. In general, a collection needs to be seasoned for 12 full months. If you have collection accounts within the past 12 months, you may still qualify for a mortgage loan. That being said, if you have recent collections, you must receive automated approval from the AUS system (Automated Underwriting System).

Manual Underwriting Guidelines on Mortgage With Collection Accounts

If you do not receive an automated approval, and your file must be downgraded to a manual underwrite loan, The collection accounts must be a minimum of 12 months old. Collections, charge-offs, late payments, and other derogatory remarks on your credit can be incredibly confusing. This is why we encourage you to reach out to our team for a one-on-one mortgage consultation. For specific questions regarding your collection accounts, please call Gustan Cho at (800) 900-8569.

How Can I Apply For A Mortgage With Collection Accounts?

Homebuyers do not have to pay outstanding collection accounts to get approved for a mortgage. Gustan Cho Associates allows borrowers to qualify for a mortgage with collection accounts.

Since we are able to help potential borrowers who have collection accounts, we encourage you to apply with our team today. The application process with Gustan Cho Associates is an incredibly easy process. First, we encourage you to reach out to our team to go over your basic qualifications on an initial phone call. After this phone call, you will be paired with a licensed loan officer in your state.

After you are paired up with your licensed loan officer, you will fill out an online application. This application will give our team permission to pull your credit and move forward with your pre-qualification. This link will also provide you with a secure portal to upload your income and asset documentation. After your loan officer has the required items, you will be issued a pre-approval letter. If for any reason you do not qualify for a mortgage loan today, your highly skilled loan officer will set up a detailed plan to qualify as soon as possible.

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Best Mortgage Lenders For Mortgage With Collection Accounts

Our team at Gustan Cho Associates works with many credit-challenged individuals and is here to assist and point you in the right direction. We have access to over 160 different lenders who have an array of mortgage programs available. Since we have access to so many programs and are currently licensed in 48 states, we are able to help more clients than most mortgage banks. Even if you have been turned down by a lender in the past, we strongly encourage you to reach out to our team to go over your mortgage qualifications.

Most banks and lending institutions have additional lender overlays on their programs which could be holding you back from qualifying for a home loan. We are available to answer questions seven days a week and are always on call. Our team would love the opportunity to earn your business.

You can contact us at Gustan Cho Associates for any questions about Mortgage with Collection Accounts by calling us at (800) 900-8569 or text us for a faster response. You can also email us at gcho@gustancho.com or alex@gustancho.com. Our expert Loan Officers are available even during weekends and holidays!

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