Can I Get Approved For FHA Loans With Collection Accounts
In this article, we will cover and discuss getting approved for FHA loans with collection accounts. Home Buyers who are looking to get qualified for a purchase mortgage loan or a refinance mortgage loan can qualify for FHA loans with collection accounts without having to pay outstanding collections and charge-offs.
HUD Guidelines state that borrowers can qualify for FHA loans with collection accounts.
Can You Buy a House If You Have Unpaid Collection Accounts?
All mortgage agency guidelines do not require outstanding collections and charged-off accounts to be paid on primary owner-occupant homes. This includes FHA, VA, USDA, and conventional loans. If a mortgage company requires you to pay outstanding collections and/or charged-off accounts, it is due to lender overlays by the lender and not agency guidelines.
Lender overlays are additional lending requirements by the individual lender that is above and beyond the agency guidelines of HUD, VA, USDA, Fannie Mae, and Freddie Mac.
Should I Pay Oustanding Collection Accounts To Get an FHA Loan?
If a lender requires you to pay outstanding collections and/or charged-off accounts on a primary owner-occupant home mortgage loan, go to a different lender where they do not require collections and/or charged-off accounts to be paid. Non-QM Mortgage Lenders has no lender overlays on government and conventional loans.
Mortgage Borrowers should also keep in mind that paying off a recent collection account or charge-off account can drop credit scores. However, older collection and charged-off accounts will have less impact on credit scores as they age with time.
Can Paying Old Collection Accounts Drop Your Credit Scores?
Paying off an old open collection account can drop a person’s credit score by 40 points or more. The reason is that paying older collections and charge-off accounts will re-activate the date of the last activity.
A sudden credit score drop can instantly disqualify a mortgage loan borrower due to not meeting the minimum credit score requirement. The minimum credit score required to qualify for a 3.5% down payment FHA Loan is 580 FICO.
Qualifying For FHA Loans With Collection Accounts
Borrowers can definitely qualify for FHA loans with collection accounts without having to pay outstanding balances. Home Buyers can qualify for FHA loans with collection accounts without paying off the outstanding collection balance. Home Buyers who want to purchase a new home usually check their own credit report and credit scores before they even consult with a mortgage loan officer. Remember you do not have to pay collections because you can qualify for FHA loans with collection accounts.
When consumers pull their credit report, they realize that their scores are not bad but may see older collections and charge-off accounts that have been aged. Then they take the initiative by paying off the old collection accounts.
Do Lenders Have Different Guidelines on FHA Loans With Collection Accounts?
Every lender has different FHA loan requirements on FHA loans. All lenders need to meet the minimum HUD agency mortgage guidelines but lenders can have lender overlays on FHA loans. Lender overlays are higher lending requirements above and beyond HUD minimum lending requirements on FHA loans.
Many mortgage applicants assume that they will not qualify for FHA loan collection accounts. Others assume that paying off outstanding collections and charge-offs will increase their credit scores. That is definitely not the case. HUD Guidelines On Collections And Charge Offs does not require borrowers to pay outstanding collections and charge-offs to qualify for FHA Loans.
Paying Off an Old Collection Account Re-actives The Date of Last Activity
If a mortgage loan borrower, for example, has a credit score of 570 FICO and needs to get to a 580 FICO credit score, they are not going to get a credit score boost by paying off older outstanding collections and/or charge off accounts. The effect will be the opposite. Paying off outstanding collections and charge-offs will most likely drop their credit scores. The reason is that it will re-activate the date of the last activity. It will also re-activate the statute of limitations.
Old Collection Accounts Have Little To No Impact On Credit Scores
Common sense dictates that paying off collection accounts should improve credit scores. However, the credit score computer has a brain of its own in calculating a person’s credit score. The derogatory item on a credit score has less and less impact on a credit score as time goes by. Old collection accounts that are over 2 years old will have very little or no impact on credit scores.
Paying off an old collection account can drop credit scores? Paying off an old collection account can drop credit scores? Let me restate that: Not will paying off an old collection account can drop credit scores but will drop credit scores. What happens is that the delinquent collection account that had no impact on credit scores will suddenly get revived and will now have an impact on credit scores.
Borrowers Can Still Qualify For FHA Loan With Collection Accounts
FHA Borrowers can still get FHA loans with collection and charge-off accounts. If the mortgage lender requires to pay off a particular open collection account due to their FHA Lender Overlays, borrowers can pay off the collection at closing. Borrowers should with the loan officer prior to credit repair or paying outstanding collections. Mortgage brokers/bankers do not charge anything for consultation and the only way they get paid is once the mortgage loan closes.
