USDA Direct Loan denial question

[jessL7]

My fiance received a letter from our rural development office that basically denied us our direct loan application because his "credit history does not meet agency standards".  We had read about this topic online and in the USDA Direct Loan 502 PDF, so we sort of expected something like this to happen because we know our credit is really bad, even though we have been working on it.  The letter shows the creditors/collection amounts so we can pay them off.  But, what I would like to know is should he pay them in a lump sum or make payments to show he is capable of paying them on time, etc. 

For a quick summary of our situation, my fiance makes $23k/yr gross which I believe is considered very low for our area and probably any area for that matter.  His score has improved by 8 points over the last few months of paying off some collections.  He doesn't have any credit card debt but his collections are:

1. Medical bill from emergency room for $702

2. Bank debt for $625 (due to overdraft fees and a closed account - he can't open a bank account until this is paid)

3. A loan for $140

The letter from the office says to "Provide a written explanation for the above accounts", but we know there really isn't any justification for these and it is our responsibility to pay them, and we want to, we just don't know the best way to go about it.  When he called the office to speak to the lady at the USDA office, she was very short and said they aren't asking him to pay them off, as it wouldn't matter, but just to send an explanation for the accounts.  She really didn't answer our questions about the best way to go about it.  I read that we would have to wait 6 months after paying off accounts, so I didn't know if we should just pay them off and reapply in 6 months or if we should make payments on them to show we are making payments on time.  Since he doesn't have any other credit cards, etc. to build his credit, part of me thinks that making monthly payments would be one way to show he is making payments on time.  He was denied the Capital One secured credit card because he doesn't have a bank account do to the above bank debt in collections.

In short, should we: Pay the collections in full and reapply in 6 months?  Set up monthly payments on the collection accounts?  Send in the explanation for the accounts and do nothing??

Please advise!  Thanks

[TimeToRecover]

Hi,

Once an account is charged off payments on a charged off account is not like payments on a CC or Loan.  If you make payments then the account will continue to show as updated on your credit report making it never age.  

I would pop over to the rebuilding forum I think there might be some good ideas there for best way to pay and then get these removed.  

You state no credit card debt but does he have any CC or current loans.  One thing most mortgages look for is recovery after negatives.  Rebuilding will also have alot of good ideas on this as well.

I wish you good luck at least you are looking on how to bounce back.  It can be done!

[jessL7]

Thank you so much TimeToRecover!  He doesn't have any CC's, debit cards or loans and these are the only debts he has.  His credit score on CreditKarma is 574 and it says it's TransUnion.  It only lists the bank collection, so I know it probably isn't 100% accurate.  I have a bank account that his paycheck is direct deposited into, so that is how we are able pay bills (through my checking account/debit card). 

I am new to this site so I will check out the rebuilding forum also, thanks for that tip!  I thought I had read that if you pay off your collections accounts that you can reapply for the direct loan after 6 months.  The lady at the USDA office also said that we would need to wait 6 months after paying the collection accounts, but for what I don't know. I don't know if she just meant we have to wait 6 months before reapplying, or it takes 6 months for them to be deleted..??  She didn't give much explanation to anything so we are left a little confused overall. 

It's definitely a slow process and a bad rollercoaster of emotions also, but all we can do is try our best I guess!  Thanks for the tips and encouragement!

[ShanetheMortgageMan]

USDA may have a record of your previous application and that is why they suggest waiting 6 months.  Although it's tough to say.  It's definitely not how long it'll take to delete off your credit, as collections only fall off credit once they've reached the statute of limitations for credit reporting.. or you do a pay-for-delete.  Using the HIPAA program at http://www.whychat.5u.com/GUIDE%20HIPAA%20PROGRAM.html can get the medical colllection deleted though.

[danw77]

Here are the credit requirements directly out of the USDA Handbook. Any of these factors will result in a request for a LOE, and most likely  a denial.

Indicators of Unacceptable Credit

•Little or no credit history. The lack of credit history on the credit report may be mitigated if the applicant can document a willingness to pay recurring debts through other acceptable means such as third party verifications or canceled checks. Due to impartiality issues, third party verifications from relatives of household members are not permissible.

• Payments on any installment account where the amount of the delinquency exceeded one installment for more than 30 days within the last 12 months.

• Payments on any revolving account which was delinquent for more than 30 days on two or more occasions within the last 12 months.

• A foreclosure that has been completed within the last 36 months.

• An outstanding Internal Revenue Service (IRS) tax lien or any other outstanding tax liens with no satisfactory arrangement for payment.

• Two or more rent or mortgage payments paid 30 or more days late within the last 2 years. If the applicant has experienced no other credit problems in the past 2 years, only 1 year of rent history will be evaluated. This requirement may be waived if the program loan will reduce shelter costs significantly and contribute to improved repayment ability.

• Outstanding collection accounts with a record of irregular payments with no satisfactory arrangements for repayment, or collection accounts that were paid in full within the last 6 months, unless the applicant had been making regular payments previously.

• Non-Agency debts written off within the last 36 months, unless the debt was paid in full at least 12 months ago.

• Agency debts that were debt settled within the past 36 months, or are being considered for debt settlement.

• Delinquency on a federal debt.

• A court-created or court-affirmed obligation or judgment caused by nonpayment that is currently outstanding or has been outstanding within the last 12 months, except:

     ◊ A bankruptcy in which:

          ♦ Debts were discharged more than 36 months prior to the date of application; or

          ♦ Where an applicant successfully completed a bankruptcy debt restructuring plan and has demonstrated a willingness to meet obligations when due for the 12 months prior to the date of application.

     ◊ A judgment satisfied more than 12 months before the date of application.

You can see above where the 6 month requirement for collection accounts comes from. If he can get on a payment plan to repay the collections, he should be OK - he just needs to show "satisfactory arrangements for repayment". USDA will include that payment plan in the DTI.

Credit scores don't matter for USDA Direct except if your middle score is above 640 it will automatically qualify you regardless of the above.

[danw77]

You will find this link very helpful if you are using USDA Direct.

http://www.rurdev.usda.gov/handbooks.html#hb1

The DLOS Field Office Handbook is what you want to read. All of the info is there. The Credit Requirements are covered in Chapter 4, Section 3 (page 4-43).

[jessL7]

Thanks so much for all the replies - very useful info!  We sent our LOE today and we will see what happens.  I have to say that I am expecting the worst but still hopeful that something good may come of it.  Even if we are denied, I feel posititve that we can remedy the collections and have a good chance of reapplying in 6 months.

danw77 -

"Outstanding collection accounts with a record of irregular payments with no satisfactory arrangements for repayment, or collection accounts that were paid in full within the last 6 months, unless the applicant had been making regular payments previously."

This is the only reason on the list that you posted that we would have received a LOE.  So based on what this section above says, I would think the best way for us to take care of this (should our LOE not work and we're still denied), would be to pay off the collections in full and wait 6 months, since it states that there can be collection accounts paid in full - just not in the last 6 months.  And this just supports what our area technician told us - although she was too rushed to explain it very well. We haven' t been making regular payments on them so it seems the fastest way to do this would be to pay them off in full and wait 6 months to reapply.  Of course there's always the chance that making monthly payments would look better, but I don't know that it would make a difference or not and it would take a lot longer unless we set them up to be very high payments for just a few months.  Not sure if this is possible or if it would help though..?

One thought I had was if we pay the bank collection off now (and the others as well), then he would be able to open a bank account - which would then allow him to be approved for the Capital One Secured CC.  He didn't qualify before because he doesn't have a bank account (since he currently has a bank collection, he can't open a bank account anywhere).  If he had the CC then he could show that he is making monthly payments and also raise his credit score.  I was approved for the Capital Once Secured CC and my score has increase 21 points in just a few months.

[jessL7]

ShanetheMortgageMan -

USDA may have a record of your previous application and that is why they suggest waiting 6 months.  Although it's tough to say.  It's definitely not how long it'll take to delete off your credit, as collections only fall off credit once they've reached the statute of limitations for credit reporting.. or you do a pay-for-delete.  Using the HIPAA program at http://www.whychat.5u.com/GUIDE%20HIPAA%20PROGRAM.html can get the medical colllection deleted though.

USDA does have our current application since we have not "officially" been denied yet and are still in the approval process, so there is no "previous application" yet.  From what I understand, the purpose of waiting 6 months is based on the USDA's criteria for a SFH 502 Direct Loan that states collection accounts can not be paid off in full within 6 months of applying for the USDA Direct Loan.

I looked into the HIPAA link you sent and it definitely seems like a good way to have a collection removed and pay the debt to the original acct., however because our situation is time sensitive, it seems like a long process and we may just be better off paying it off and not going through the HIPAA program.  I will probably do this for my own credit though since I have 2 medical bills in collections and I am not on the application for the loan so I am not in a rush.

Thanks for the info!

[jessL7]

danw77 - forgot to mention... thanks for the link!  I have saved several of the USDA pdf's to my computer but haven't had a lot of time to read through them with a teething 23 month old at my side all day!  Will look at this link though while he is asleep

[DanTheMan77]

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"Outstanding collection accounts with a record of irregular payments with no satisfactory arrangements for repayment, or collection accounts that were paid in full within the last 6 months, unless the applicant had been making regular payments previously."

This is the only reason on the list that you posted that we would have received a LOE.  So based on what this section above says, I would think the best way for us to take care of this (should our LOE not work and we're still denied), would be to pay off the collections in full and wait 6 months, since it states that there can be collection accounts paid in full - just not in the last 6 months.  And this just supports what our area technician told us - although she was too rushed to explain it very well. We haven' t been making regular payments on them so it seems the fastest way to do this would be to pay them off in full and wait 6 months to reapply.  Of course there's always the chance that making monthly payments would look better, but I don't know that it would make a difference or not and it would take a lot longer unless we set them up to be very high payments for just a few months.  Not sure if this is possible or if it would help though..?

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This is why I quoted the exact rules per USDA. If your goal is to qualify as quickly as possible, you may not need to pay off the collection. You may only need to set up payment arrangements. I'm not sure if they will require you to establish a payment history as well, but I seem to rember someone posting on here a few months ago that they only had to make 2 payments. If that's the case, you will qualify in two months. If you pay it off, you need to wait 6 months. I know the people at the USDA are extremely busy, so they don't always answer your questions the first time. I would keep pushing them for an answer.

You also have the possibility of doing a PFD. Before you make any payments, call the collection agency and ask if they will delete the item from your credit report if you pay it in full. Make sure you get any such agreement in writing first. Again, not sure if your goal is to qualify as soon as possible or something else.