Collection accounts on the credit report can sometimes hurt your chances of getting approved for a Kentucky Mortgage loan in Two ways:
First, if collections are recent, they may drag down your credit score, and secondly, if large enough, sometimes they are required to be paid before closing and final loan approval
Collections accounts for a debt that have been submitted to a collection agency by the creditor generally due to nonpayment. Below are general tips and guidance on what the FHA and Fannie Mae Underwriters will require when collection accounts are reporting on a borrower’s credit report. Accounts that are reported as past due but not yet turned over to a collection agency must be brought current. These past due accounts are not considered collection accounts.
Kentucky Fannie Mae or Conventional loans – Underwriting must follow AUS or Automated Underwriting findings through DU to determine if a collection account must be paid. Typically DU will require the following:
- One Unit Principal Residence loans will not require pay off of collections or non-mortgage charge offs regardless of the amount.
- Two – Four Unit Owner Occupied and Second Home loans will require collections and non-mortgage charge offs totaling more than $5,000 to be paid in full prior to or at closing.
- Investment property loans will require any individual collection or non-mortgage charge off equal to or greater than $250 and all accounts that total more than $1000 to be paid in full prior to or at closing.
Kentucky FHA Mortgage Loans and Collections–
Underwriting must follow DU to determine if a collection account must be paid, even on a manual underwrite. Typically DU will require the following:
- If the credit report shows a cumulative balance of $2,000 or more for collection accounts:
- The debt(s) must be paid in full prior to or at closing, or
- Payment arrangements must be made with the creditor and the monthly payment included in the DTI, or
- A monthly payment of 5% of the outstanding balances of each collection must be included in the borrower’s DTI.
- Collection accounts of non-borrowing spouses 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. Community property states are Arizona, California, Texas, Washington, and Wisconsin.