@StartingOver10 wrote:
There are two schools of thought on paying charge offs before making a mortgage application:
1) Pay it before you apply so you can negotiate a better deal with the CA. If you apply for a mortgage a mortgage inq will show on your report and the CA will be much less negotiable because they know you have to pay the charge off to close. BTW, you don't always have to pay. Depends on the lender and the size of the charge off.
If you can negotiate a pfd before you apply that is the best thing to do (if possible) Then the charge off is paid and not showing on your report.
2) Wait to see what the underwriter says about it. You may not have to pay it at all.
Have you thought about just meeting with the mortgage person and showing him your reports and scores and finding out what their lender overlays are? That might be the best first step, that way you can wait to apply if they for sure need the CA paid off. That will give you time to negotiate without a lender pull on record. Lender pulls show up instantly -so there is no turning back (as far as the CA being able to see the inq) once you have had the lender check your credit.
+1.
This is directly from the HUD FHA guidelines:
4155.1 4.C.2.e Paying off Collections and Judgments FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.
But, also see 2013 Mortgagee Letter: 4155.1 4.C.2.e Capacity Analysis of Collections and Judgments Collections - FHA does not require collection accounts to be paid off as a condition of mortgage approval. However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the borrower’s ability to repay the mortgage. To mitigate this risk, FHA is requiring a capacity analysis of collection accounts with an aggregate balance equal to or greater than $2,000, as described below. If the total outstanding balance of all collection accounts for all borrowers is equal to or greater than $2,000, the lender must perform a capacity analysis as detailed below. Unless excluded under state law, collection accounts of a non-purchasing spouse in a community property state are included in the cumulative balance. All medical collections and charge off accounts are excluded from this guidance and do not require resolution. Capacity analysis includes any of the following actions:
1. At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).
2. The borrower makes payment arrangements with the creditor. If the borrower has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio.
3. If evidence of a payment arrangement is not available, the lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the monthly payment in the borrower’s debt-to-income ratio.
I would ask your LO what they think is best for your situation. If your DTI would not be pushed over a threshold because of the 5% clause, and you do not want to pay the collections, you may be okay. In the end, it will most likely be up to you (and possibly your lender's overlays) whether you want to simply qualify for the mortgage or completely pay off the collections/charge-offs.
