Repossession on a credit report for FHA Loan


Does FHA require collections to be paid off for a borrower to be eligible for FHA financing?
A Collection Account refers to a Borrower’s loan or debt that has been submitted to a collection agency by a creditor.

If the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the lender must:

•     verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds;
•     verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s Debt-to-Income ratio (DTI); or
•      if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI.

Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless excluded by state law.

Unless the lender uses 5 percent of the outstanding balance, the lender must provide the following documentation:

•     evidence of payment in full, if paid prior to settlement;
•     the payoff statement, if paid at settlement; or
•     the payment arrangement with creditor, if not paid prior to or at settlement.

For manually underwritten loans, the lender must determine if collection accounts were a result of:

•     the Borrower’s disregard for financial obligations;
•     the Borrower’s inability to manage debt; or
•     extenuating circumstances.

The lender must document reasons for approving a mortgage when the Borrower has any collection accounts. The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file.

For additional information see Handbook 4000.1 II.A.4.b.iv(M); II.A.5.a.iii(D), II.A.5.a.iv(O)  at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Mortgage Lending Requirements for FHA, VA, and Conventional Mortgage Loans.


FHA:

FHA home loans are mortgages insured by the federal government through the Federal Housing Administration (FHA), a branch of the Department of Housing and Urban Development. FHA home loans reduce the barrier to entry for homebuyers and refinancers by featuring low down payments, flexible credit requirements, and more purchase power. If funds are limited, an FHA home loan can help you finance more than 80% of your home value.

What are FHA loan requirements?

In order to ensure that you meet the minimum FHA loan requirements, you need to consider the following factors:

  • Are you over the age of 18?
  • Do you have a valid Social Security number and lawful residency in the United States?
  • Do you have a steady employment history? If not, have you at least worked for the past two years?
  • Can you afford the minimum down payment of 3.5% 580  or 10% 500 (depending on credit score)?
  • Do you have a credit score above 500 to 580?
  • Have you been out of bankruptcy for at least the past two years? (If the answer is no, there may still be exceptions that can be made on a case-by-case basis.).
  • Will this home be your primary residence?

You’ll likely need to be able to answer all of these questions with a hearty ‘YES’ in order to meet FHA home loan requirements.

VA:

The US Government’s VA loans program helps veterans, active-duty service members, and their families qualify for a home loan. Though they are issued by private lenders like MLB Residential Lending, VA home loans are backed by the US Department of Veterans Affairs.

VA home loans feature no down payment or private mortgage insurance (PMI) requirements, making them a great choice for any veteran or active service member looking to purchase a home. For this reason, a guaranteed VA loan is often the best and easiest way for veterans to purchase a home of their own.

A VA loan is a no-brainer for qualified homebuyers and refinancers. The intended candidate is a service member or surviving spouse with a clean financial record.

Ask yourself these four questions to determine if you meet the minimum VA home loan requirements:

  • Are you a current or ex-military personnel?
  • Are you the surviving spouse of current or ex-military personnel?
  • Have you defaulted on a home loan within the last 12 months?
  • Have you declared bankruptcy within the last two years?

If you answered “YES” to either of the first two questions and a resounding “NO” to questions three and four, you most likely meet the basic VA home loan requirements.

Conventional Loans

A conventional loan is a mortgage not insured or guaranteed by a government agency such as the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA). As compared to FHA loans, a conventional mortgage typically requires a higher credit score. These loans will also require Private Mortgage Insurance (PMI) for loans with less than a 20% down payment. These loans are subject to maximum loan limits. Loans that exceed the maximum limit are known as Jumbo loans.

Here are some of the benefits of a conventional loan, refinance or cash-out refinance:

  • Conventional loans may be used to purchase investment properties or a second home
  • No private mortgage insurance is required if you put 20% down
  • A variety of flexible loan term options to fit your needs whether it’s a 15-year or a 30-year
  • No upfront mortgage insurance premium
  • The ability to refinance into a conventional loan from any other loan type may allow you to take advantage of lower interest rates
  • To be eligible for a conventional purchase, refinance or cash out a loan you should have:
  • Good credit, typically 620 or greater FICO.
  • Provide a down payment, ideally 20% to avoid Private Mortgage Insurance (PMI).
  • Show proof of income and two years of tax returns.
  • Cash reserves on hand to cover closing and additional costs.
  • Ensure total debt does not exceed 45% of your income.