topic Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13 in Mortgage Loans

FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13)

ShanetheMortgageMan — Fri, 16 Aug 2013 19:11:38 GMT

A new FHA mortgagee letter came out yesterday that sets new guidelines for dealing with collection accounts, judgments & disputed trade lines on credit.

The full mortgagee letter can be found at http://portal.hud.gov/huddoc/13-24ml.pdf with http://portal.hud.gov/huddoc/13-25ml.pdf as a follow up (pretty much just says the same thing as the first one).

The effective date of these changes are for new FHA case #'s pulled on or after 10/15/13. You cannot have an FHA case # pulled unless you have a property idenitified (on a refinance that is easy since you already own the property, but on a purchase you need to have an accepted offer on property) and FHA case #'s do not transfer from property to property, they stick with the same property.

The changes are:

If the loan is being manually underwritten (does not apply to loans that receive an Approve/Accept), then an explanation for all owing collections & judgments is needed. Currently nearly all underwriters are requiring an explanation anyway, however this clarifies that an explanation is mandatory and is no longer up to underwriter's discretion. The letter will be used to determine if the collections or judgments were from the borrower’s disregard for financial obligations, the borrower’s inability to manage debt or extenuating circumstances. If the loan receives an Approve/Accept response from the automated underwriting system (for FHA loans the automated underwriting system is called FHA TOTAL) then this policy does not apply, but even in the situation of an Approve/Accept most underwriter's still require letters of explanation for derogatory credit (that is still being left to underwriter's discretion though).

Regardless if the loan is being manually underwritten or has an Approve/Accept response, owing collections will have a greater impact on someone's ability to qualify - FHA is now requiring a "capacity analysis" of collection accounts with an aggregate balance equal to or greater than $2,000 (this includes non-borrowing spouse's in community property states). The following guidelines do not apply if the outstanding balance on all collection accounts is less than $2,000 (again, this includes non-borrowing spouse's in community property states). Also keep in mind that all medical collections and charge off accounts are excluded from this guidance.

"Capacity analysis" includes any of the following actions:
- At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).
- 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.
- 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.

What that means is the owing collection accounts will either need to be paid in full, payment arrangements need to be made, or if a payment arrangement isn't made and the account is not paid in full, then 5% of the balance of the collection will be included as a payment when calculating the debt to income ratio.

Judgments will now be required to be paid in full or be on a payment plan with at least 3 months of payments being made. The borrower must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to underwriting approval. Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. FHA also requires owing judgments from a non-purchasing spouse in a community property state to follow the same guideline.

Disputed accounts are being handled differently than they have been in the past. If the cumulative outstanding balance of disputed "derogatory credit accounts" of all borrowers is equal to or greater than $1,000, the mortgage application must be downgraded to a “Refer” and an underwriter is required to manually underwrite the loan. If the cumulative outstanding balance of disputed derogatory credit accounts of all borrowers is less than $1,000, a downgrade is not required. Certain accounts are excluded, such as disputed medical accounts & disputed derogatory credit accounts resulting from identity theft, credit card theft, or unauthorized use (however in the latter a letter is needed from from the creditor, or other appropriate documentation to support the dispute, such as a police report disputing the fraudulent charges).

"Derogatory credit accounts" are defined as disputed charge-off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months. Disputed derogatory credit accounts of a non-purchasing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a “Refer”. "Non-derogatory disputed accounts" are excluded from the $1,000 cumulative total. "Non-derogatory disputed accounts" include disputed accounts with zero balance, disputed accounts with late payments aged 24 months or greater, and disputed accounts that are current and paid as agreed.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

StartingOver10 — Sat, 17 Aug 2013 13:53:18 GMT

Thank you Shane for posting this new ML!

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

coterotie — Sun, 18 Aug 2013 16:09:57 GMT

Couple of questions:

What type of explanation is required for collection accounts that are not reported on the "regular" credit report and are outside the statute of limitations?
Do I need to add my wife to my brokerage accounts to use the assets for reserve calculations? It complicates their administration if it isn't just in my name.
My wife is the beneficiary of her deceased mother's IRA, this is a recent occurence. Is this counted as a gift or just regular funds? We'll probably use some of this money and some of my trading profits to pay off a judgement that we have been making payments on for the last 3 years. Is this permitted?
Finally, my wife will "retire" in January and start receiving a 4.5K monthly pension in February. She will still work her at her old job drawing her same salary etc. (double dipping) How will this income be treated? Does it have to age to be counted?

I'm trying to do some financial engineering so my rich uncle in Washington doesn't take everything.

Thanks for your help.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

Anonymous — Sun, 18 Aug 2013 23:58:42 GMT

I'm slightly confused about the part where charge off are excluded. I have a charge off from an auto loan where the car was totaled and there was a balance left over. A lender told me that I had to pay it off or make payment arrangements. Are these new rules saying that I do not have to?

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

EmpressLuv — Mon, 19 Aug 2013 00:05:07 GMT

@Anonymous wrote:
I'm slightly confused about the part where charge off are excluded. I have a charge off from an auto loan where the car was totaled and there was a balance left over. A lender told me that I had to pay it off or make payment arrangements. Are these new rules saying that I do not have to?

Skinsfan83, I had that same problem and my loan officer said that I should call the bank and start making payment arrangements. I decided not to and wait for underwriting to say so. Underwriting didnt ask me to pay it at all, they just wanted a letter of explanation. I closed on my home in May.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

Anonymous — Mon, 19 Aug 2013 00:24:33 GMT

I wonder if the amount has something to do with her telling me to pay it? It's around $6,000. I'm thinking she didn't send it to underwriting because my mid score was only 629 and I have an unpaid judgment. I'm going to pay the judgment in the next few weeks. She also wanted me to pay down my CC which I will be able to do in a few weeks too. The charge off is scheduled to fall off in February so I was just going to hold off and wait until then but if I can get approved with the charge off I would like to start looking now.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

Anonymous — Thu, 22 Aug 2013 00:11:04 GMT

Hello all,

I'm new to this community and have spent a great deal of time reading and taking notes on all the great information this site has to offer. This topic and article was especially interesting (ShanetheMortgageMan, you rock!!). My hubby and I have been concentrating on our scores with the hopes of qualifying for a home early next year. My hope is that we will qualify for an FHA loan, but slightly confused on the changes.

In summary, we have paid all the accounts that agreed to delete. I have several old credit card accounts (all paid) that went delinquent in 2008 and a handful of medical bills that are still outstanding on my credit (2009-2011). My husband has a few phone bills, cable and a couple of unpaid medical bills. The lowest amount is $30 and the highest amount is $600. All of which are showing"disputed by consumer". Here are my questions (thank you for your patience!):

We've made all of out installment loan payments on time for the last year, but still showing accounts in dispute. Should we remove those statuses or does it matter?
Do we need to address any of the unpaid collections/CO accounts that are less than $1000?

Thanks so much for your time!

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

DallasLoanGuy — Thu, 22 Aug 2013 00:53:58 GMT

@coterotie wrote:
Couple of questions:
What type of explanation is required for collection accounts that are not reported on the "regular" credit report and are outside the statute of limitations? lenders arent concerned with statute of limitations. lenders are concerned with 'willingness to pay'
Do I need to add my wife to my brokerage accounts to use the assets for reserve calculations? It complicates their administration if it isn't just in my name.
My wife is the beneficiary of her deceased mother's IRA, this is a recent occurence. Is this counted as a gift or just regular funds? inheritance = regular funds We'll probably use some of this money and some of my trading profits to pay off a judgement that we have been making payments on for the last 3 years. Is this permitted? sure. it is your money
Finally, my wife will "retire" in January and start receiving a 4.5K monthly pension in February. She will still work her at her old job drawing her same salary etc. (double dipping) How will this income be treated? Does it have to age to be counted?
I'm trying to do some financial engineering so my rich uncle in Washington doesn't take everything.
Thanks for your help.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

fixmycred14 — Thu, 22 Aug 2013 03:28:20 GMT

Hi,

I am a little confused...so charge-offs are "excluded" and will not disqualify you from obtaining an FHA loan?

What about charge-offs that have fallen off of the report that are 10+ years old? Are you required to disclose this information?

I've heard that the min score is 580 or 620. Which is correct to qualify for an FHA loan?

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

ShanetheMortgageMan — Fri, 23 Aug 2013 23:35:47 GMT

@coterotie wrote:
Couple of questions:
What type of explanation is required for collection accounts that are not reported on the "regular" credit report and are outside the statute of limitations?
Do I need to add my wife to my brokerage accounts to use the assets for reserve calculations? It complicates their administration if it isn't just in my name.
My wife is the beneficiary of her deceased mother's IRA, this is a recent occurence. Is this counted as a gift or just regular funds? We'll probably use some of this money and some of my trading profits to pay off a judgement that we have been making payments on for the last 3 years. Is this permitted?
Finally, my wife will "retire" in January and start receiving a 4.5K monthly pension in February. She will still work her at her old job drawing her same salary etc. (double dipping) How will this income be treated? Does it have to age to be counted?
I'm trying to do some financial engineering so my rich uncle in Washington doesn't take everything.
Thanks for your help.

1. If collections aren't reported on the credit report and are no longer owed, then I wouldn't think they'd need any explaining. Just as if a bankruptcy occurred in the past and it is no longer on credit because of the SOL for reporting, it also wouldn't need to be explained. Now if there was a collection not on credit that is within it's SOL for being able to be collected, that should be disclosed and would have to follow the new collection guideline.

2. If your wife is the only one on the mortgage, and she wants to use those accounts as reserves, then she would need to be on those accounts.

3. If your wife's mother passed away and she is inheriting the IRA, then as long as you can document it was an inheritance then it wouldn't be counted as a gift. It would be fine to use those funds to pay off the judgment.

4. As long as her employment is expected to continue then she should be able to use her salary, and pension income from the same job is fine to qualify with at the same time. For the pension, a copy of the award letter + up to 3 months of bank statements showing the pension is being deposited would be needed.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

ShanetheMortgageMan — Fri, 23 Aug 2013 23:38:46 GMT

@Anonymous wrote:
I wonder if the amount has something to do with her telling me to pay it? It's around $6,000. I'm thinking she didn't send it to underwriting because my mid score was only 629 and I have an unpaid judgment. I'm going to pay the judgment in the next few weeks. She also wanted me to pay down my CC which I will be able to do in a few weeks too. The charge off is scheduled to fall off in February so I was just going to hold off and wait until then but if I can get approved with the charge off I would like to start looking now.

Each lender may have their own underwriting overlays. Per current FHA guidelines, there is no requirement to pay charge-offs or collections or have them entered into a payment plan. Some lenders still require collections/charge-offs over a certain amount to be paid though, so it's always good to ask about the owing collection/charge-off policy during the initial conversations with your loan officer.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

ShanetheMortgageMan — Fri, 23 Aug 2013 23:44:58 GMT

@Anonymous wrote:

We've made all of out installment loan payments on time for the last year, but still showing accounts in dispute. Should we remove those statuses or does it matter?
Do we need to address any of the unpaid collections/CO accounts that are less than $1000?

1. It depends on if they would fit into the "derogatory credit accounts" definition of disputed charge-off accounts, disputed collection accounts, and disputed accounts with late payments in the last 24 months. So if those installment loans have had late payments within the past 24 months then you should probably remove them from being in dispute otherwise your loan would need to be manually underwritten (which isn't the end of the world, but it makes it more difficult to qualify).

2. It depends on what the total accumulated amount of unpaid non-medical collections are and if your debt ratio can absorb 5% of the balances (if total non-medical collections are $2k or more) as a monthly payment.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

ShanetheMortgageMan — Fri, 23 Aug 2013 23:49:02 GMT

@fixmycred14 wrote:

I am a little confused...so charge-offs are "excluded" and will not disqualify you from obtaining an FHA loan?

What about charge-offs that have fallen off of the report that are 10+ years old? Are you required to disclose this information?

I've heard that the min score is 580 or 620. Which is correct to qualify for an FHA loan?

Per FHA, correct, charge-offs will not be looked at more negatively than they currently are now. Lenders are free to make their own "overlay" guidelines on top of FHA's though.

If the charge-off is still within it's SOL, yes.

FHA just requires a 500 credit score, but anything less than a 580 credit score requires a 10% down payment. Further, any score less than 620 and debt-to-income ratio that exceeds 43% must be manually underwritten.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

ShanetheMortgageMan — Thu, 17 Oct 2013 16:45:21 GMT

Just a reminder that these new guidelines are now in effect for any new FHA loan that had it's case # pulled on 10/15/13 or afterwards.

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

Ms-Thang38 — Fri, 18 Oct 2013 01:40:12 GMT

congrats & very informative...

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

TeeGee — Sat, 16 Nov 2013 21:25:37 GMT

I want to apply for an FHA loan and I am wondering about the new collection account on my credit report for $3,600 to a hospital for a surgery. Before that, my credit score was 690 with almost maxed credit cards - once the cards are paid off by the end of this month, my score WOULD be over 700.

I noticed this memo "excluded" medical collections. Does anyone know if that means they are overlooked or require further scrutiny?

Thanks in advance!

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

TeeGee — Sat, 21 Dec 2013 17:56:21 GMT

Shane, was hoping you could answer this question:

I want to apply for an FHA loan and I am wondering about the new collection account on my credit report for $3,600 to a hospital in 2008 for a surgery. Before the CA hit my credit report in October of 2013, my credit score was 690 with almost maxed credit cards - once the cards are paid off by the end of this month, my score would be over 700.

I noticed this memo "excluded" medical collections. Does this mean they are overlooked or require further scrutiny?

Thanks in advance!

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

Anonymous — Mon, 06 Jan 2014 20:21:44 GMT

I was also wondering about the same medical bill exclusion. We have a medical collection that has been on our report for two years for $5100. There was an issue with insurance and we tried to dispute having to pay. Can we get an fha loan due to it being a medical collection?

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

homebound2 — Sat, 11 Jan 2014 05:18:53 GMT

Re: FHA changing collection account, judgments & disputed account guidelines (effective 10/15/13

ShanetheMortgageMan — Tue, 14 Jan 2014 23:52:46 GMT

Medical collections are excluded. You would have to explain the collection, but FHA doesn't require it to be paid/in repayment/etc. Individual lenders may have overlay guidelines that require it to be paid though, for example there is one lender I know of that requires all collections to be paid if the total balance on them is $5k+.