FHA Loan Articles

September 24, 2018 - FHA borrowers who have experienced this negative credit event often wonder if it account collections in their credit histories will hurt their chances for FHA home loan approvals; much depends on the age, the amount, circumstances, and lender requirements in this area.

What we address here involves the FHA loan standards for processing a loan application where a collection account is present in the credit record. Our discussion here does NOT address your chosen participating lender’s requirements.

Those requirements may be more strict than FHA minimums, or they may simply observe the FHA requirement with no further instructions for the loan officer. You will need to discuss your specific circumstances with a loan officer to determine what is possible at that financial institution.

FHA Loan Approval Rules for Applicants With Collections in Their Credit History

The FHA Loan Handbook, HUD 4000.1, has specific instructions for the lender when it comes to collection accounts, starting with how the FHA defines a collection:
“A Collection Account refers to a Borrower’s loan or debt that has been submitted to a collection agency by a creditor.”

In these cases, the when a lender is “manually underwriting” the mortgage, she is required to take certain steps if the collection account involves account balances of $2,000 or greater.

The lender must, “verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds” plus insure the borrower has made satisfactory payment arrangements.

When Collection Account Payment Arrangements are not Available

In cases where a payment arrangement is not available, the lender is required to calculate a hypothetical monthly payment “using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI ratio.”

If the borrower lives in a community property state where the debts or financial obligations of a non-borrowing spouse may be a factor based on state law, the FHA lender must observe the following requirement found on page 270 of HUD 4000.1:

“Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless specifically excluded by state law.”

Talk to your loan officer about your concerns if you are worried that your collection account may interfere with the approval of your FHA mortgage.

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