If You Have A Collection Account Or Charge Off On Your Credit Report, You Are Still Eligible To Buy A Home, Or Refinance Your Existing Residence.
It’s not uncommon to see collection accounts or charged off accounts on an applicant’s credit report. The good news is that in most cases our borrowers still obtain financing with attractive rates and terms.
First The Definitions
- A charge off occurs after an account has gone into default for nonpayment and numerous attempts have been made to collect the debt. It can typically take 31 – 120 days before the creditor cease collection attempts and writes the account off as bad debt. Once the account is written off (taken off the creditor’s books), it’s charged off.
- Rather than take a 100% loss the creditor will sell the account to a collection agency for a percentage of the amount owed. According to Investopedia’s Debt Management Guide, the average amount collection agencies pay for bad debt is 4%, or four cents for each dollar owed. Once sold the account changes status from a charged off account to a collection account.
- The change in status from a charged off account to a collection account is not always immediate. There can be a lag between the time an account is charged off and it goes to collections.
How Are Charge Offs & Collection Accounts Treated When Applying For A Mortgage?
Conventional Loans: When applying for Conventional Loan on a single family residence, collection accounts and charge offs don’t have to be paid. When applying for a Conventional loan on 2 – 4 units, or an investment property, collection accounts and charge offs exceeding $5,000 have to be paid in full.
FHA: Non-medical collection accounts, or charged off accounts, totaling $2,000 or less do not have to be paid. Medical collections or charge offs do not have to be paid. On non-medical collections or charge offs exceeding $2,000, the lender will include 5% of the balance in the applicant’s debt-to-income ratio. For example, if the applicant has a $4,000 collection account, the lender will include 5%, or $200, in the applicant’s monthly debt-to-income ratio. No payment is required, but the lender confirms that the applicant can comfortably make a payment should that creditor pursue them in the future or obtain a judgment. Please Note: These are general rules. When the file is reviewed the underwriter is looking for habits, patterns and acts of financial irresponsibility. Even though charge offs and collections are generally not required to be paid, keep in mind that if you’ve had 10 collections in the past two years you’ll probably be declined.
VA: Charged off accounts generally don’t have to be paid. Non-medical collection accounts totaling $2,000 or less do not have to be paid. Medical collections or charge offs do not have to be paid. On non-medical collections or charge offs exceeding $2,000, the lender will include 5% of the balance in the applicant’s debt-to-income ratio. For example, if the applicant has a $4,000 collection account, the lender will include 5%, or $200, in the applicant’s monthly debt-to-income ratio. No payment is required, but the lender confirms that the applicant can comfortably make a payment should that creditor pursue them in the future or obtain a judgment. Please Note: These are general rules. When the file is reviewed the underwriter is looking for habits, patterns and acts of financial irresponsibility. Even though charge offs and collections are generally not required to be paid, keep in mind that if you’ve had 10 collections in the past two years you’ll probably be declined.
USDA: With an Accept finding from USDA’s AUS, and the underwriter’s concurrence, charge offs are not required to be paid. Medical collections do not have to be paid. Non-medical collection accounts totaling $2,000 or less do not have to be paid. On non-medical collections or charge offs exceeding $2,000, the lender will include 5% of the balance in the applicant’s debt-to-income ratio. For example, if the applicant has a $4,000 collection account, the lender will include 5%, or $200, in the applicant’s monthly debt-to-income ratio. No payment is required, but the lender confirms that the applicant can comfortably make a payment should that creditor pursue them in the future or obtain a judgment. Please Note: These are general rules. When the file is reviewed the underwriter is looking for habits, patterns and acts of financial irresponsibility. Even though charge offs and collections are generally not required to be paid, keep in mind that if you’ve had 10 collections in the past two years you’ll probably be declined.
To find out more about foreclosure wait periods, please contact us today.
Call 855.SLG.FUND (855.754.3863) or inquire below.
Square Peg? Round Hole?
We can help you.