FHA eases mortgage rules for some credit-impaired applicants for collections and charge offs


FHA Collection Accounts
• A Collection Account refers to a Borrower’s loan or debt that
has been submitted to a collection agency by a creditor.
• Medical Collections are not required to be paid and satisfied.
• 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 specifically
excluded by state law.

If the credit reports used in the analysis show a cumulative
outstanding collection account balances of $2,000 or greater,
the Mortgagee 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 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: Documentation
• The Mortgagee must provide the following documentation:
– Evidence of payment in full, if paid prior to settlement; or
– The payoff statement, if paid at settlement; or
– The payment arrangement with creditor, if not paid prior to or
at settlement.
• If the collection account is to be paid off, the Mortgagee must
document that the funds being used for the pay off come
from an acceptable source.
• If the Mortgagee uses 5 percent of the outstanding balance,
no documentation is required.

Charge Off Accounts
• A Charge Off Account refers to a Borrower’s loan or debt that
has been written off by the creditor.
• Charge off accounts do not need to be included in the
Borrower’s liabilities or debt.

Additional Required Documentation for
Collection and Charge Off Accounts
• Mortgagee must determine if collection account was due to:
– The Borrower’s disregard for financial obligations;
– The Borrower’s inability to manage debt; or
– Extenuating circumstances.
• Mortgagee must document reasons for approving a mortgage
when the Borrower has any outstanding collection accounts.
This includes medical collections.
• Borrower must provide a letter of explanation, which is
supported by documentation, for each outstanding collection
account. This includes medical collections.

Joel Lobb (NMLS#57916)
Senior  Loan Officer
American Mortgage Solutions, Inc.
Company ID #1364 | MB73346

Text/call 502-905-3708

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