This guide will cover getting approved for a mortgage with outstanding collections. The team at Gustan Cho Associates often gets countless calls daily from borrowers who ask if they can qualify for a mortgage with outstanding collections. Will outstanding collections and charged-off accounts yield higher mortgage rates? Should I pay off outstanding collections and charged-off accounts?
Will paying off the outstanding collections and derogatory credit tradelines boost my credit scores? Yes, paying recent collection account with a pay for delete with a collection agency will increase your credit scores. Collections do not have to be paid. But doing a pay for delete will increase your credit scores.
Why do most lenders require that I pay off my outstanding collections and charged-off accounts to qualify me for a home mortgage? The answer to qualifying for a home mortgage with outstanding collections and charged-off accounts is YES. Mortgage borrowers do not have to pay outstanding collections or charged-off accounts to qualify for a home loan. In the following paragraphs, we will cover getting approved for a mortgage with outstanding collections.
Mortgage With Outstanding Collections Agency Guidelines Versus Lender Overlays
Most lenders will have lender overlays. FHA, VA, Fannie Mae, and Freddie Mac do not require borrowers to pay outstanding collections or charged-off accounts. However, lenders can set their lending requirements above and beyond the minimum agency guidelines. Lenders can require borrowers to pay outstanding collections or charged-off accounts even though borrowers do not have to per FHA, VA, Fannie Mae, or Freddie Mac. Gustan Cho Associates is one of the few national mortgage companies with no lender overlays on government and conventional loans.
Not all lenders have the same mortgage guidelines regarding outstanding collections and charged-off accounts. All lenders need to have their borrowers meet the minimum agency mortgage guidelines. FHA, VA, USDA, Fannie Mae, and Freddie Mac have their agency mortgage guidelines when it comes to collections, charged-off, and derogatory credit accounts. However, mortgage companies can have their lending requirements that are higher than the minimum agency mortgage guidelines on government and conventional loans. The added higher lending requirement above and beyond the agency mortgage guidelines is called lender overlays
Mortgage lenders can have lender overlays on just about anything. Lenders can require borrowers to pay outstanding collections as part of their lender overlays. Other lenders like us at Gustan Cho Associates have no lender overlays on government and conventional loans. This holds on outstanding collections. Gustan Cho Associates has zero overlays on collections or charged-off accounts. Gustan Cho Associates only goes off the automated findings of the automated underwriting system (AUS).
Do All Lenders Have The Same Requirements on Collections and Charged-Off Accounts
All lenders must meet the minimum agency mortgage guidelines on government and conventional loans. However, lenders can have higher lending requirements above and beyond the minimum agency mortgage guidelines. This holds on collection accounts or charged-off accounts.
All agency mortgage guidelines do not require outstanding collections or charged-off accounts to be paid off to qualify for an owner-occupant primary home loan.
Collection accounts that are not paid do not affect mortgage rates. You should not pay outstanding collections off. Most collections accounts have a statute of limitations of 5 years, depending on the state. Any collection accounts or derogatory credit tradelines older than 24 months will have little to no impact on your credit scores.
How Mortgage Underwriters View Outstanding Collection Accounts
Mortgage borrowers do not have to pay outstanding collections and charged-off accounts. However, there are ways mortgage underwriters view outstanding collection accounts. There are two types of collection accounts:
- Medical collections
- Non-Medical collections
For all non-medical collection accounts with an unpaid outstanding balance of $2,000 or greater, the mortgage underwriter needs to take 5% of the total aggregate balance and use it as a hypothetical debt when calculating the borrower’s debt to income ratios: This holds true even though the borrower does not have to pay anything and leave the collection accounts alone.
Exempt Debts From 5% of Outstanding Collections on Non-Medical Collections
Non-medical collection accounts with a total aggregate outstanding balance of $2,000 or less are exempt from the 5% rule. If 5% of the outstanding balance is too much, the borrower can negotiate a written payment agreement with the creditor.
The negotiated amount on the written payment agreement is the monthly debt versus the 5.0% of the outstanding balance. There is no seasoning requirement on the number of months the monthly payment from the written payment agreement needs to be seasoned.
When the written payment agreement is negotiated and executed, borrowers can use the new written payment agreement versus the 5% of the outstanding collection balance. Medical collections are exempt from the 5.0% rule. Charged-off accounts are also exempt from the 5.0% rule.
Qualifying For A Mortgage With a Lender With No Overlays
Gustan Cho are mortgage brokers licensed in 48 states, including Washington, DC, Puerto Rico, and the U.S. Virgin Islands. The team at Gustan Cho Associates has access to 210 wholesale mortgage lenders, including dozens of non-QM wholesale mortgage lenders. Eric Jeanette, the Chief Financial Officer at Gustan Cho Associates explains why Gustan Cho Associates is thriving while other lenders are laying people off and closing their operations:
Gustan Cho Associates has a national reputation for being able to do mortgage loans other lenders cannot do due to lender overlays. Over 80% of our clients are borrowers who could not qualify at other mortgage lenders due to the lender overlays.
Gustan Cho Associates has no overlays on government and conventional loans. Gustan Cho Associates has no lender overlays on collections and charged-off accounts. To qualify for a mortgage with outstanding collections and charged-off accounts, please get in touch with us at Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays.
