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How to Get a Home Loan with Collections, Charge Offs, or Judgments

Many people have experienced financial difficulties in the past, which resulted in a collection, charge-off, or judgment appearing on the credit report.

The good news is it’s not as horrible as you may assume.

The leading ‘deal maker’ at this point is Fannie Mae’s automated underwriting engine, so-called Desktop Underwriter (DU), as well as Desktop Originator (DO). The underwriting rules followed by both systems are identical.

The main difference between these two (DU and DO) is underwriters’ access and deliverability to Fannie Mae. Therefore, transferring your loan approval from DO to DU is a simple and routine procedure step.

Keep reading, and you will see other DU exceptions, including charge-offs and medical collections, which will not be counted against you and which you won’t need to pay off.

It’s all about timing
The importance of timing in knowing how old collections will influence your approval cannot be overstated.

Note: DU usually ignores anything older than 24 months.

Another essential credit restoration tip is to avoid paying off outdated collection accounts.
Although paying off old collection accounts sometimes may be advised, but this simply results in a short dip in your credit score as an aging delinquent account becomes a recent delinquent account when the status switches to “paid collection.”

For your best, more than 24 months old accounts should better be left alone.

Conventional Fannie Mae Guidelines
Non-Mortgage Past-Due, Collection, and Charge-Off Accounts
Past due accounts (which weren’t reported as collection accounts) should be kept up.

If this happens, it’s possible that there is an error on the credit report that may be fixed.

Borrowers are not obligated to pay any outstanding collections or non-mortgage charge-offs on one-unit, primary home properties, regardless of the amount.

Keep in mind: If the lender indicates in the online loan application that the collection account is Paid By Close, DU will provide a notification in the DU Underwriting Findings report saying that the collection must be paid.

Collections and non-mortgage charge-offs totaling more than $5,000 must be paid in full before or at closing for two-to-four unit owner-occupied and second home properties.

Individual collection and non-mortgage charge-off accounts of $250 or more, as well as accounts totaling more than $1,000, must be paid in full before or at closing for investment properties.

Which factors does DU consider as Risk Ones?

(Public Records, Foreclosures, and Collection Accounts)

You may be classified as a high-risk client if you have a big adverse credit event in your credit history.

Bankruptcy, foreclosure, deed-in-lieu of foreclosure, pre-foreclosure sale, mortgage charge-off, judgments, tax liens, or accounts handed over to a collection agency – all mentioned above are significant negative credit events.

The more ‘fresh’ such events, the more negative the influence on your creditworthiness.

Even though most public record information is preserved in the credit history for seven years (ten years for bankruptcies), it becomes less important to DU’s credit evaluation with time.

FHA Judgment Guidelines
In a community property state, a judgment refers to any obligation or monetary responsibility of the Borrower and the Borrower’s spouse, either prohibited by state law or created by a court or other adjudicating authority.

Before or at closing, your lender must confirm that any court-ordered judgments have been handled or paid off. In a community property state, a non-borrowing spouse’s judgments must be addressed or paid in full, with the exception of debts exempt by state law.

Note: A Judgment is deemed resolved if the Borrower has signed into a legitimate agreement with the creditor to complete regular payments on the debt. The Borrower has made regular payments for at least three months of scheduled installments, and the judgment does not trump the FHA-insured mortgage lien.

Obligations are not considered as a debt under FHA guidelines

– medical collections
– federal, state, and local taxes, if not late and no payments are needed
– automatic deductions from savings, if not connected with another form of obligation
– FICA and other retirement contributions, such as 401(k) accounts
– Loans secured by collateralized bank accounts
– utilities
– child care
– the expense of commuting
– labor union dues
– insurance that is not property insurance
– open accounts with no balances.
– voluntary deductions when it’s not linked to another form of obligation

Collections and Open Derogatory Accounts should be initiated in response to DO or DU findings.

VA Guidelines for Derogatory Credit
In non-bankruptcy situations, satisfactory credit is normally deemed reestablished once the veteran and spouse have made sufficient payments for 12 months after the last adverse credit item was satisfied.

Suppose a credit report displays multiple overdue collections, some of which have been pending for several years.

Satisfactory credit is rebuilt once the Borrower has completed the obligations and then makes regular payments on the following commitments for at least 12 months.

Collections: Isolated collection accounts may not always have to be paid off in order for a loan to be approved. A credit report, for example, may show multiple good accounts and one or two overdue medical (or other) collections.

While it is desirable to have collections paid in such cases, it is not always a necessity for loan approval.

On the other hand, collection accounts must be regarded as part of the Borrower’s entire credit history, and unpaid collection accounts should be considered open, recent credit.

Borrowers having a history of collection accounts should have restored acceptable credit (see the paragraph above) to be classified as an acceptable credit risk.

Remove Credit Report Disputes
Before submitting your application to an underwriter, you must remove all disputed items from your credit report.

You can get the disputes removed by contacting the entity who placed the complaints on your behalf or by contacting the credit agencies directly and requesting that the dispute be removed.

If you have a dispute on a recent overdue account, it may impact your credit score once the dispute is resolved. However, most older disputes do not affect your credit score in real life.

The essential thing to understand is that medical collections and charge-offs are typically not considered as harmful to your credit.

If you’re conducting this study to see if you should even try to be pre-approved, don’t; it’s probably not as horrible as you think.

If you’re unsure and need a consultation – you can always reach us out, and here, at LBC Mortgage, we’ll be more than happy to help.

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