03-06-2009 09:32 AM
I am wanting to buy my first house this year to take advantage of the $8000 stimulus incentive. However, I'm curious if collection accounts need to be paid before I close on a FHA loan? I've read some conflicting information on this subject here in the forums so I'm a little unclear about the correct answer.
The collection accounts are all between 6 - 6.5 years old and exceed $35K in total. If they need to be paid before I close then I would just rather wait until they fall-off my credit report(s) next year and lose the incentive. However, if they don't need to be paid before closing then I would like to procceed with my home purchase now.
So, should I go ahead and try to pre-qualify with lenders or do I need to be concerned about these delinquent accounts? FYI, all of my FICO scores are at or above 700 so that shouldn't be an issue.
Any help would be appreciated.
03-06-2009 09:43 AM
No, they do not need to be paid under FHA guidelines. Individual lenders may have overriding guidelines that require them to be paid however (i.e. one bank's FHA loan program may require it to be paid, while the bank next door does not require them to be paid).
You'll need to provide a letter of explanation though, detailing why those are there (unemployment, divorce, whatever) and what you've done since then to ensure they don't happen again - not sure exactly how hard the underwriter looks at these letters.
03-06-2009 01:16 PM
As stated FHA does not require collections to be paid. But, the underwriter is usually suppossed to use their judgement as to whether any of the listed debts pose a threat to the buyers ability to repay the mortgage. That is why some lender are more strict and just require them all to be paid, Some don't require them to be paid, and some do it on a case by case basis. 35K in old debts is an awful lot for an UW to overlook no matter how far back they go. One judgement for a large debt of that size (with a garnishment attached to it) would wipe out almost anybodys ability to pay a loan off. Most UW will be very leary of 35K in old debt. That is not the same as someone who had a couple hundred or a couple thousand in old debts. It probably can not hurt to apply, but I would expect some questions and hesitation from the lender due to those.
03-06-2009 01:49 PM
Thanks for the replies.
Actually, when you count both my unpaid collections and charge-offs together, the total delinquent amount exceeds $50K. Needless to say that I got in WAY OVER MY HEAD several years ago with overspending but I've learned my lesson and worked hard to get my finances back in order.
I was hopeful that my current 700+ FICO scores would be enough for a lender to overlook all of my baddies. However, I just may be better off waiting until some (if not all) of these accounts drop-off my credit reports within the next year. I just hate to lose out on the $8000 stimulus incentive but patience may be my best move here.
I appreciate the advice.
03-06-2009 04:13 PM
Yeah, if you are looking at 50K plus in unresolved debt, most UW are going to have a problem with that. Not only does it show a history (although way in the past) of not paying debt. It also shows a willingness to walk away from said debt without paying it off. Again, from their perspective, all it would take it for one of those large debts to become a judgement/garnishment to seriously compromise your mortgage.
Again, it can not really hurt to try. If you find a lender that says yes then you have lost nothing. If they say no you took 1 inquiry hit. If it gets you in now with the 8K credit and they let the other stuff slide then you are in great shape.
03-06-2009 06:08 PM - edited 03-06-2009 06:09 PM
I would think it would have something to do with the laws in your state as well how they would view the collection accounts. For example, in CA (where I live), the statute of limitations is 4 years for most unsecured debts, and the law expressly forbids any attempt to start a legal action after that time limit to collect on the debt (they can, of course, still call or write you, but they no longer have any recourse to the court system). SOL's vary by state - some have SOL's as long as 10 years (which means they could legally come after you for a debt that is old enough to no longer show on your credit report, but still within the SOL for that state). If you're outside of the SOL for your state, the lender doesn't have to worry about any of those debts eventually resulting in a judgement or garnishment order against you (6 years is pretty long, outside the SOL for most states I believe).
Of course, they will still consider it a history of non-payment of debts, but with a strong enough recent file, they may approve the loan anyway.
03-06-2009 06:48 PM
I live in Texas and the SOL is 4 years. So none of these accounts have the ability to become judgments, garnishments, etc. However, I would feel rather embarassed explaining my past history and reckless overspending to an UW. I was hoping that my FICO scores alone would qualify me without having to go through that process but that's probably too much to ask.
Looks like I have some decisions to make.
Thanks again for all of the replies.
03-06-2009 06:55 PM
Hubby's FICOs when we started: high 400s (June 2008)
Hubby's FICO NOW (04/06/09): TU: 679 EQ: 608 EX: ???
My FICOs: TU: 643, EQ: 606
Closed on new home: 1/20/2009 -- If we can do it, YOU can do it!!
03-06-2009 06:59 PM
Some lenders want them paid and some do not.
We see this subject all of the time.
Ask the loan officer you apply with first thing. They will know their policy.
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