2018 FHA Guidelines for Collections & Charge Offs

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All lenders and banks have exactly the same FHA guidelines for charge offs to qualify for FHA loans. This is a common misunderstanding many people have about FHA loans. When it comes to FHA loans, the requirements of all lenders are not the same. When you apply for a mortgage, one lender might require you to pay outstanding charge offs and collections while another might not ask for this.

According to the 2018 FHA Guidelines for Collections and Charge Offs, a borrower is not required to settle or pay off a charge off in order to qualify for an FHA loan. The FHA guidelines for collections and charge offs stipulate that there aren’t any limits on how much the charge off is for borrowers to qualify for an FHA loan. These guidelines are set by the United States Housing and Urban Development or most commonly known as HUD. Most people are unaware of what HUD does. HUD is an organization of the United States government that sets out all the guidelines of FHA including the lending guidelines for mortgage. HUD aims to promote ownership of homes in the United States of America.

Understanding FHA’s Role

Do you know what Federal Housing Administration (FHA) is and what its role is? The FHA is a government agency that runs under the U.S. HUD. Some people commonly misunderstand the role of the FHA. The FHA isn’t a lender and FHA Loans are not funded or serviced by the FHA. The FHA is an agency of the United States government that plays the role of an insurer for mortgage lenders or/and banks that are responsible for funding FHA loans. The lender is insured by the FHA for events where a borrower defaults on his/her FHA loans.

FHA loans are funded by FHA lenders and banks and offer loose credit requirements and low down payment. Due to the promotion of home ownership by the HUD and the guarantee that is offered to lenders by the FHA, mortgage lenders able to offer home loans to borrowers at a low down payment and low interest rate. The FHA understands that many of the hardworking American people go through financial hardship sometime in their life and believes that they deserve a second chance.

Can I Qualify for FHA Loans after Bankruptcy?

Many home buyers think that if they faced bankruptcy, they cannot qualify for a mortgage to buy a new home. This is not the case and even after bankruptcy, home buyers can still qualify for an FHA home loan. There are different requirements of FHA for Chapter 13 Bankruptcy and Chapter 7 Bankruptcy.

Requirements for FHA Loan with Chapter 13 Bankruptcy

In Chapter 13 Bankruptcy, the petitioner pays all of his or her debt or a part of it over the period of three to five years. Chapter 13 Bankruptcy is different from Chapter 7 Bankruptcy where all the debts are elimininated and assets get liquidated to pay off debts. Since the petitioner attempts to pay his or her debts under Chapter 13 Bankruptcy and makes an effort, the requirements for FHA Loans for those who file Chapter 13 Bankruptcy are lenient.

Borrowers who file Chapter 13 Bankruptcy can qualify for an FHA Loan after one year has elapsed into the repayment plan. However, borrowers are required to make 12 timely payments before they can qualify for an FHA Loan. In addition, approval is required from the Chapter 13 Bankruptcy Trustee. After the petitioner has been discharged from the Chapter 13 Bankruptcy, there isn’t any waiting period to qualify for the FHA Loans. However, some lenders require a waiting period of two years after the discharge date which is neither an FHA guidelines nor is such condition stated by the HUD.

Requirements for FHA Loan with Chapter 7 Bankruptcy

In Chapter 7 bankruptcy, since the petitioner doesn’t make an effort to pay off his or her debts, the requirements of FHA loans for those who file Chapter 7 Bankruptcy are stringent. After the date of discharge from Chapter 7 Bankruptcy, borrowers must wait for two years before they can qualify for an FHA Loan.

Can I Qualify for an FHA Loan After Housing Event?

You can qualify for an FHA home loan after housing event, but there are certain waiting period requirements. In case of foreclosure, you must wait for three years after the date of foreclosure in order to become eligible for an FHA loan. In case of deed in lieu of foreclosure, you must wait for three years after the date of deed in lieu of foreclosure before you can qualify for an FHA loan. The same requirement applies for short sale and you must wait for three years after the date of short sale of your property before you can qualify for an FHA loan.

Can I Qualify for an FHA Home Loan with Bad Credit?

You can qualify for an FHA home loan with bad credit. However, in most cases, timely payments in the last 12 months are required for approval by Automated Underwriting System (AUS). You might get approved for an FHA Loan by Automated Underwriting System if there are only one or two late payments made in the last 12 months, however, if there are more late payments, you will not get approved. The FHA understands that borrowers can have periods of derogatory or bad credit, but FHA requires borrowers to re-establish their credit and history of timely payments for last 12 months in order to qualify for an FHA home loan.

Borrowers are not required by the FHA to pay unpaid collection accounts in order to qualify for an FHA home loan. Moreover, the 2018 FHA guidelines for charge off allow borrowers to qualify for an FHA home loan without paying any charge off accounts.

Can I Qualify for an FHA Home Loan with Tax Liens and Judgment?

United States Housing and Urban Development allows borrowers to qualify for an FHA home loan with outstanding tax liens and judgment.

FHA Requirements for Judgment

You can qualify for an FHA loan with any outstanding judgment without paying it in full. However, written payment agreements made with the creditor of judgment is required. Canceled checks of three months are also required. Once the borrowers have executed a written payment agreement with the creditor, they cannot pre-pay the payment of three months upfront. Seasoning of three months is required.

FHA Requirements for Tax Liens

Borrowers can qualify for FHA home loans without paying off tax liens. However, similar to FHA’s requirements for judgment, you must provide a written payment agreement and three months of canceled payments and checks. Once the borrowers have executed a written payment agreement, they cannot pre-pay the payment of three months upfront. Payments of three months must be seasoned for 3 months.

Other Issues Borrowers Must be Aware Of

When it comes to mortgage, the policies of FHA are quite lenient and it tries to make it easy for home buyers to acquire a loan. If you cannot get approved for an FHA loan per AUS, most mortgage lenders would downgrade the application for loan to a manual underwriting. For approval per manual underwriting, timely payments of 12 months are required. Verification of rent is also required by manual underwriting.

As per the 2018 FHA guidelines for collections and charge offs, borrowers are not required to pay off any outstanding charge off accounts or collection accounts in order to qualify for an FHA home loan with a 3.5 percent down payment. For borrowers who have a history of bad credit, FHA home loan is an ideal program and borrowers will find it easy to qualify for an FHA home loan in comparison to other conventional loan programs.

2018 FHA Guidelines for Charge Off

When borrowers consult with mortgage lenders and loan officers at lending institutions about loan requirements, they are often told that they cannot qualify for an FHA home loan if they have outstanding collection accounts? Why do lenders say that when the FHA guidelines allow borrowers to qualify for an FHA home with outstanding collection accounts or charge off accounts?

Some common things that borrowers with outstanding collection accounts hear from mortgage lenders and bank officers include:

  • If you have outstanding collection accounts, you can never qualify for an FHA home loan unless you pay them.
  • After the collection account has been paid, you must wait until the payment reflects on your credit report.
  • In order to qualify for an FHA home loan, the collection account must be paid in full and should be seasons for 12 months.
  • The maximum amount of collection account balance you can have on your credit report should not exceed $5,000. If it does, you won’t be able to qualify for an FHA home loan.

The mortgage lenders say these things from their own and they declare their own guidelines instead of following those set by the FHA. These requirements make it hard for home buyers with outstanding collection accounts to qualify for an FHA home loan.

Home buyers should know that as per the updated 2018 FHA guidelines for collections and charge offs they can qualify for an FHA home loan with outstanding collection accounts and charge off accounts. If a mortgage lender tells you that you cannot qualify for an FHA home loan with outstanding collection accounts and charge off accounts, don’t work with him/her and seek a mortgage lender that follows the guidelines set by FHA.

Understanding FHA Lender Overlays

Some mortgage lenders won’t approve you for an FHA home loan even when you meet the guidelines set by FHA. Higher loan requirements may be set by a lender that does not follow the FHA guidelines. The additional lending requirements that FHA lenders set themselves are known as lender overlays. These requirements make it hard for home buyers to qualify for an FHA home loan and goes against the goal of HUD to promote ownership of homes in the United States of America.

According to the 2018 FHA guidelines for collections and charge offs, no matter how much the balance of charge off account is, borrowers are not required to pay any of it to qualify for an FHA home loan. They can qualify for a home loan without paying the charge off accounts and collection accounts and FHA lenders should offer FHA loan to these borrowers.

Some banks and lenders have caps on charge offs. For example, many mortgage lenders and banks require borrowers to have collection accounts not exceeding $5000 to qualify for an FHA home loan.

If you wish to qualify for an FHA home loan with outstanding charge off accounts and collection accounts, then work with an FHA lender who follows the guidelines set by the FHA. Don’t work with mortgage lenders who tell you that you must pay outstanding collection accounts in order to qualify for an FHA home loan or the maximum amount of collection account balance should not exceed $5,000. These are all FHA lender overlays and are against the guidelines set by the FHA.

Mortgage lenders who set additional guidelines for FHA home loans are making it hard for home buyers to qualify for an FHA home loan. Borrowers believe that these strict requirements are set by the FHA, but you must understand that this isn’t the case. This information has been provided to you so that you seek mortgage lenders that are following the updated 2018 FHA guidelines for collections and charge offs.  Just because you have outstanding collection accounts or charge off accounts doesn’t mean that you cannot qualify for an FHA loan.

If you have been denied a home loan or have any questions about real estate or mortgage please contact the author, Matt Herbolich, MBA, JD, LLM by phone or text at 786.390.9499 or by email at mherbolich@usa-mortgage.com. Mr Herbolich works when you work, so feel free to contact him any time.

Matthew Herbolich
Matthew Herbolich
Mr. Herbolich is a Senior Loan Officer at USA Mortgage, #NMLS 227262. He is an expert not only in lending but multiple facets of real estate, particularly the title industry. Matt trains his fellow loan officers on title industry topics, real estate investing, and countless mortgage guidelines. Have any questions? Call at 888-900-1020 or send email to: mherbolich@usa-mortgage.com

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