FHA Charge Off Guidelines and Collection Accounts

FHA Charge Off Guidelines and Collection Accounts

Do you know that some lenders have tougher guidelines than others when it comes to FHA loans?  FHA collection guidelines and FHA charge off guidelines can be confusing.  FHA guidelines vary by lender and working with a lender that does not have an internal guideline on top of FHA guideline will minimize the chance of a loan denial.

FHA Charge Off Guidelines

An explanation of charge off accounts does not need to be explained when you have approved Automated Underwriting System (AUS) findings. Charge off accounts are loans or debts that have been written off by a creditor.  In some cases, disputed charge off accounts need to be removed from being disputed. 

There are stipulations that require approved findings to be downgraded to a manual underwrite.

7 Reasons Why a Loan May Be Downgraded to a Manual Underwrite

1. The file contains information or documentation that cannot be entered that can affect the insurability of the mortgage.
2. The bankruptcy discharge date is within two years.
3. Foreclosure, short sale, or deed-in-lieu date within three years.
4. Undisclosed mortgage debt.
5. In some cases, disputed derogatory credit, which can be removed before pulling credit.
6. Mortgage trade lines showing a certain amount of lates in the past 12 months.
7. Other factors listed on the findings determining the loan needing to be downgraded to a manual underwrite.

An experienced Loan Originator will go over the findings before issuing a pre-approval letter to prevent any unforeseen circumstances during underwriting. Manual underwriting views charge off accounts differently than approved findings.

Charge Off Accounts and Manual Underwriting

When there is a history of charge off accounts, an underwriter will require an explanation for approving the mortgage with supporting documentation from the borrower. An underwriter will consider if the charge off accounts were:

• A disregard for financial obligations.
• Inability to mange debts.
• Extenuating circumstances.

The best way to find out if you qualify for a FHA loan is to go through the pre-approval process and run your case scenario by a Loan Originator.

FHA Collection Guidelines

With an automated underwriting approval, a borrower is not required to explain collection accounts as long as the findings do not have any stipulations that downgrade it to a manual underwrite.  If the cumulative balance of outstanding collections is $2,000 or greater, the collection accounts must be determined by the following:

• The payment arrangement will be used in the debt-to-income calculation when there is a payment arrangement.
• If a payment arrangement is not available, 5% of the outstanding balance will be used with the debt-to-income calculation.
• If the debt has been paid in full, the debt will need to be verified that it was satisfied.
  • The debt can be paid at closing with a payoff.

The Automated Underwriting System (AUS) is run during the pre-approval process by the Loan Originator. If the information provided is entered in correctly, there will be consistency with the final underwriting decision.