Confused about collections and FHA

[anca21bi]

I've been reading posts and still would like to get some things cleared up...

-If you have a collection that is over $1000, you have to pay it off or be in a payment plan for 6 months in order to be approved for FHA no matter how old it is?

-Or if you have a lot of reserves and a 640 mid credit score, it does not need to be paid?

-Or does it just depend on the lender?

What is correct? If it just depends on the lender-where can I find me a lender that I can work with?! 

[BrianB_The_Loan_Professor]

FHA says that of you have combined collectionsof over $2000 (non medical)

that 5% of the amount must be used in your DTI but it does not say you have to pay them off

Collections  at the banks discretion and they all have their own policies

The stronger your loan file the better your chances 

[DallasLoanGuy]

what brian said.....

and

ask friends/family/coworkers for a referral to a lender they used and were happy with.

or, ask a realtor.

[BrianB_The_Loan_Professor]

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@anca21bi wrote:

I've been reading posts and still would like to get some things cleared up...

-If you have a collection that is over $1000, you have to pay it off or be in a payment plan for 6 months in order to be approved for FHA no matter how old it is?

-Or if you have a lot of reserves and a 640 mid credit score, it does not need to be paid?

-Or does it just depend on the lender?

What is correct? If it just depends on the lender-where can I find me a lender that I can work with?! 

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tell us a little about your situation  - what are your concerns with regards to your scenario

[anca21bi]

This is my situation, I had a financial counselor for down payment assistance tell me I SHOULD pay off the high collections but not something I must do to get approved. She told me it would just look better, overall,I would just like to get approved in the next 3 months for a FHA loan. Does it look feasible? What should I do?

• Credit. Scores, 620, 639, 595, BK in 2009,Paid Judgement in 2011-tried to fight it to the death, 2 Collections  -1 repo from 2012 for $5400 (this is a time I moved across state to take a part-time contract job from being on unemployment for 2 years) OC and CA both reporting, and I have a balance from when I obtained my masters degree for $2200 from 2011. Other small collection accounts paid, and no lates for over 12 months. I have 2 revolving accounts, and $145,000 in student loan debt that is deferred until June 2015.Then I will enter IBR for 10 years until loans will be forgiven.
• Income.  $4300 a month
• Source of income.  Salary employment.
• Monthly debt payments.  $457.00
• Employment (for those who are employed).  Full-time teacher, for 2 years with current school district, been in education field for 5 years + college
• Assets/Reserves.  $7000 plus down payment assistance that can be upwards to $10K and qualified for Homes for Heroes program will pay for closing costs.
• Location.  Washington state, Pierce County or South King County
• Property.  Is it a single family house,
• Value.  $200-225,000
• Occupancy.  Primary residence
• Transaction Type.Purchase

[MsSara]

If you find a bank that will pre approve you would you please let me know i also live in Washington, Everett. my credit is similar to yours. Thank you

[ShanetheMortgageMan]

anca21bi, it's possible you could get approved, however the debt ratio is a bit on the high side for a $225k sales price which would be about your max (looks much better for a $200k sales price)... particularly with the $145k in student loan payments looming in the future.  The negative items on credit after the BK would be a bit concerning for underwriting as well, you may need to have clean credit for 24 months due to that (when there is a series of derog items after a BK, usually underwriting will apply the BK waiting period to the most recent derog item).

[anca21bi]

Would I qualify for the Back to Work program? The derogatory items after bankruptcy is when I lost my job in 2010, and depleted my savings while looking for work that took me a year and a half to find.

[ShanetheMortgageMan]

The Back to Work program just allows someone to qualify before the 2-year waiting period after a Ch 7 BK discharge (or 3 year waiting period after a foreclosure or short sale).  If you explain the reason for the negative items after the BK & can back it up with documentation (i.e. the tax returns for those years showing your income was low) then that would help your situation out.  It doesn't make the underwriter completly dismiss the negative items after the BK but it'll soften the impact they'll have on the underwriting decision.