A lot of people have had money challenges in the past, resulting in a collection, charge-off, or judgment showing up on their credit report.
It’s not as bad as you might think most of the time.
Your Credit Score’s Importance In Qualifying For A Mortgage
Many people think their credit score is the only important thing underwriters look at when determining whether to grant you a mortgage. But actually, they go much deeper than that, into the specific items that make up your credit score.
This actually can work in your favor because some collections, judgments, and other credit problems that severely hurt your credit score aren’t considered in underwriting or aren’t weighted as strongly as the credit scoring companies do in calculating your score. I’ll discuss these in this article.
Before we get into the nitty gritty of each type of collection, judgment, or write-off, may I make a suggestion? This is confusing, complicated stuff. You can research online and may end up getting the right answer, or you may not.
You really could use advice from an expert to give you accurate answers. We hate it when we hear of people not buying because they’ve made assumptions or have been denied by a lender who doesn’t accurately understand the rules.
The solution to this is simple – if you’re worried about judgments, collections, chargeoffs, foreclosures, bankruptcy, tax liens, preforeclosures, or any other negative credit-related issue, we can give you a Second Opinion Here.
While we can’t always guarantee to give you good news, we can guarantee that we will do everything we can to help you get into a mortgage and home.
So you know, underwriters use one of two tools to analyze your mortgage credit worthiness: Destktop Underwriter (DU) or Desktop Originator (DO). These tools automatically consider and weigh certain aspects of your credit history and ignore other parts.
Below, you will find some of the exclusions from DU which includes charge-offs and medical collections that will not be counted against you and are not required to be paid off.
Collections, Chargeoffs, and Judgements – Timing is Important
Timing is an important factor in determining how past collections will affect your approval. DU generally ignores anything older than 24 months, so it will not affect your ability to qualify for a mortgage.
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Don’t Pay Off Old Collection Accounts
Another important credit preservation fact is that you should not try to pay off old collection accounts.
Sometimes, advice is given to pay off old collection accounts, which only results in a temporary drop in your credit score as an aged delinquent account becomes a recent delinquent account as the status changes to “paid collection.”
It is usually best to leave accounts alone that are older than 24 monthsold.
Fannie Mae Collections Guidelines for Conventional Loans
Past-Due, Collection, and Charge-Off of Non-Mortgage Accounts – Accounts that are reported as past due (not reported as collection accounts) must be brought current.
If you have brought past-due accounts current, but they aren’t showing that way on your credit report, this could be an inaccuracy on the credit report that can be corrected.
Collections or Chargeoffs – Fannie Mae
For one-unit, principal residence properties, borrowers are not required to pay off outstanding collections or non-mortgage charge-offs, regardless of the amount.
Note: If the lender marks the collection account Paid By Close in the online loan application, DU will issue a message in the DU Underwriting Findings report stating that the collection must be paid.
For two-to-four unit owner-occupied and second home properties, collections and non-mortgage charge-offs totaling more than $5,000 must be paid in full prior to or at closing.
For investment properties, individual collection and non-mortgage charge-off accounts equal to or greater than $250 and accounts that total more than $1,000 must be paid in full prior to or at closing
Risk Factors Considered by DU
Public Records, Foreclosures, and Collection Accounts
If yourcredit history includes any significantderogatory credit event, you could be considered high risk.
Significant derogatory credit events include
- bankruptcy filing
- foreclosure
- deed-in-lieu of foreclosure
- pre-foreclosure sale
- mortgage charge-off
- judgments
- accounts that have been turned over to a collectionagency
The more recent such events occurred, the more adverse the impact is on the credit profile.
Although most public record information is retained in the credit history for seven years (ten years for bankruptcies), as time passes, it does become less significant to DU’s credit evaluation.
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FHA Collections Guidelines on Judgments (TOTAL)
Judgment refers to any debt or monetary liability of the Borrower and the Borrower’s spouse in a community property state unless excluded by state law, created by a court, or other adjudicating body.
Judgements – FHA
Your Lender must verify that court-ordered Judgments are resolved or paid off before or at closing. Judgments of a non-borrowing spouse in a community property state must be resolved or paid in full, except for obligations excluded by state law.
Exception:A Judgment is considered resolved if the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, the Borrower has made timely payments for at least three months of scheduled payments, and the Judgment will not supersede the FHA-insured mortgage lien.
FHA Collections Guidelines: Obligations Not Considered Debt
- medical collections
- federal, state, and local taxes, if not delinquent and no payments are required
- automatic deductions from savings, when not associated with another type of obligation
- Federal Insurance Contributions Act (FICA) and other retirement contributions, such as 401(k) accounts
- collateralized loans secured by depository accounts
- utilities
- child care
- commuting costs
- union dues
- insurance, other than property insurance
- open accounts with zero balances
- voluntary deductions, when not associated with another type of obligation
Collections and Open Derogatory accounts should follow DO or DU findings.
VA Collections Guidelines on Derogatory Credit
In the circ*mstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date the last derogatory credit item was satisfied.
For example, assume a credit report reveals several unpaid collections, including some which have been outstanding for many years.
Once the borrower has satisfied the obligations and then makes timely payments on subsequent obligations for at least 12 months, satisfactory credit is reestablished.
Collections: Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval. For example, a credit report may show numerous satisfactory accounts and one or two unpaid medical (or other) collections.
In such instances, while it would be preferable to have collections paid, it would not necessarily be a requirement for loan approval.
However, collection accounts must be considered part of the borrower’s overall credit history, and unpaid collection accounts should be considered open, recent credit.
Borrowers with a history of collection accounts should have reestablished satisfactory credit (see the previous paragraph) to be considered a satisfactory credit risk.
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Remove Disputes on Credit Report
All disputed items on your credit report need to be removed before submission to an underwriter.
You can have disputes removed by contacting the company that put the disputes on for you, or you can contact the credit agencies directly and ask to have the dispute removed.
If a dispute is on a recent delinquent account, it could affect your credit score once the dispute is removed. Most older disputes will not affect your credit score in my experience.
Frequently Asked Questions About Collections, Charge-Offs, And Judgements
How do underwriters find judgments?
Judgments are reported in the public records portion of your credit report, on your initial application, in your paycheck stub, and on your bank statements. Underwriters are trained to spot and figure out what’s going on with judgments. Judgments found during underwriting are considered according to the guidelines for the type of loan you are applying for, as shown above.
Can you get a mortgage with collections?
You certainly can if the collections are more than two years old or if the collections are due to medical and other issues. And you may be able to even if they are new. This is something you’ll want to discuss with us so that we can give you specific answers to your questions.
Can you get a mortgage with a charge off?
It depends. If the charge off was a non-mortgage-related charge off or was for medical bills, you most likely can. How other types of charge-offs are handled differs by the type of loan you are applying for. We’ve summarized those in this article, but they’re confusing enough that we suggest you contact us. We’ll give you a definitive answer and help you find a lender that will work with you to do everything possible to get you into a home.
Need a Second Opinion?
The most important thing to remember is that medical collections and charge-offs are generally not counted against you.
If you’re doing this research to try to figure out if you should even try to get pre-approved, don’t get pre-approved, it’s probably not as bad as you think.
Need a second opinion? We can help! You can Ask Your Questionhere, and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.
