How are collections treated on a Mortgage loan in Kentucky for a FHA and Conventional Loan Approval?

Collection Account Tips for Fannie Mae and FHA Loan in Kentucky. Do they have to be paid to get approved for a Kentucky Mortgage Loan?
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.
American Mortgage Solutions, Inc.
10602 Timberwood Circle Suite 3
Louisville, KY 40223
Company ID #1364 | MB73346

Text/call 502-905-3708
If you are an individual with disabilities who needs accommodation, or you are having difficulty using our website to apply for a loan, please contact us at 502-905-3708.
Disclaimer: No statement on this site is a commitment to make a loan. Loans are subject to borrower qualifications, including income, property evaluation, sufficient equity in the home to meet Loan-to-Value requirements, and final credit approval. Approvals are subject to underwriting guidelines, interest rates, and program guidelines and are subject to change without notice based on applicant’s eligibility and market conditions. Refinancing an existing loan may result in total finance charges being higher over the life of a loan. Reduction in payments may reflect a longer loan term. Terms of any loan may be subject to payment of points and fees by the applicant  Equal Opportunity Lender. NMLS#57916

— Some products and services may not be available in all states. Credit and collateral are subject to approval. Terms and conditions apply. This is not a commitment to lend. Programs, rates, terms and conditions are subject to change without notice. The content in this marketing advertisement has not been approved, reviewed, sponsored or endorsed by any department or government agency. Rates are subject to change and are subject to borrower(s) qualification.

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FHA Collections and Disputed Accounts
Beginning October 15th, FHA is changing how they will be handling Collections and Disputed
If the sum of the borrower’s Collection Accounts total less than $2000, then payments for
these accounts do not have to be analyzed.
If the sum of the borrower’s Collection Accounts total $2000 or more, then payments for all
accounts must be analyzed and included in the DTI.
Collection Accounts can be paid off in full to avoid including the payment in the DTI. If no
evidence of monthly payment can be found for a Collection Account, 5% of the outstanding balance
will be considered as payment for calculating the DTI
Collection Accounts of a Non-Purchasing Spouse in a community property state are included in the
sum total unless state law otherwise excludes it.
All medical collections are excluded from the sum total.

**Note**: All Collection Accounts on the credit report will be considered unless exempted above.
FHA will continue to consider them in the $2000 calculation, even if paid off, until new credit is
uploaded with the Account updated/removed.
All judgments must be paid off prior to the loan closing unless there is a written agreement
for a payment plan.
In order to accept a payment plan for a judgment, the written agreement must be provided along with
evidence that at least 3 payments have been made and that all payments have been made on time.
Any payment plan for a judgment must have its monthly payment include in the DTI
Judgments of a Non-Purchasing Spouse in a community property state must be included, unless
excluded by state law.

Disputed Accounts
Disputed Accounts are considered Derogatory in any of the following situations
o Disputed charge-off accounts
o Disputed collection accounts
o Disputed accounts with any late payments in the last 24 months
2 9/30/2013
If the cumulative amount of Derogatory Disputed Accounts is $1000 or greater, the loan is
automatically downgraded to “Refer” status and is ineligible by Century Guidelines.
With acceptable provided evidence, the following types of Derogatory Disputed Accounts can be
excluded from the $1000 limit:
o Medical Accounts (no documentation required)
o Identity theft
o Credit card theft
o Unauthorized use
o Derogatory Disputed Accounts of non-purchasing spouses

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