Effective on all FHA loans assigned on or after October 15, 2013, FHA is revising their guidelines concerning Collections/Judgments, as follows:
Loans run through the AUS (automated underwriting system) and receive an Accept/Approve status will have the following conditions:
In reference to Collections:
(***NOTE: ALL MEDICAL COLLECTIONS AND CHARGE OFF ACCOUNTS ARE EXCLUDED FROM THIS GUIDANCE AND DO NOT REQUIRE RESOLUTION***)
If the total of all collections with an aggregate balance is $2,000 or below, they will have no effect.
If the total of all collections have an aggregate balance of $2,000 or higher, they will be affected as follows:
- At the time of or prior to closing, payment in full must be made on the collection account. (This will be verified by an acceptable source of funds).
- 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.
In Reference to Judgments:
The FHA requires judgments to be paid off before the mortgage loan is eligible for FHA insurance. An exception to the payoff of a court ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments. 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 credit approval.
Borrowers are not allowed to prepay scheduled payments in order to meet the required minimum of three months of payments. Furthermore, lenders are instructed to include the payment amount in the agreement in the calculation of the borrower’;s debt-to-income ratio.
For Manually Underwritten Loans:
In the majority of cases, the Lender will require these to be paid in full and/or released. Exceptions due to extenuating circumstances will be granted, but it will be a rare occurrence.
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