Fannie Mae Guidelines on Conventional Loan With Collection Accounts

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In this blog, we will cover and discuss Fannie Mae guidelines on conventional loan with collection accounts. Many homebuyers, especially first-time homebuyers are under the impression you need perfect credit, no collection accounts, no charge-offs, no late payments, high credit scores, and low debt-to-income ratios. None of the above is true. We will fact-check the assumptions the majority of the general public have about conventional loans. You will be surprised after reading this blog on Fannie Mae conventional loan with collection accounts that homebuyers can qualify and get approved for a conventional loan with collection accounts.

Can You Have Collections and Get a Conventional Loan?

As mentioned in the previous paragraph, many homeowners assume you cannot have bad credit or derogatory credit to qualify for a conventional loan. One of the frequently asked questions we get at Gustan Cho Associates is can you have collections and get a conventional loan? The answer is yes, you can on owner-occupant primary home conventional loans. There are three types of conventional loan programs: Primary homes, second homes, and investment properties. Per FNMA Conventional loan with collection accounts agency mortgage guidelines, collection accounts on primary owner-occupant homes do not have to be paid unless it is required by the lender.

Does FNMA Require Collections to Be Paid?

Not all mortgage lenders have the same requirements on conventional loans. Lenders can have higher conventional loan requirements than the minimum Fannie Mae guidelines. These higher lending requirements above FNMA guidelines are called lender overlays.  Mortgage lenders with lender overlays on collections can require collections be paid.

Can you qualify for a conventional loan with collection accounts? Homebuyers can qualify for home loans with collection accounts. Every mortgage loan program has different mortgage lending guidelines when it comes to unpaid collection accounts, charge offs, tax liens, and judgments. FHA loans have the most lenient mortgage lending guidelines with regard to unpaid collection accounts, charge offs, tax liens, and judgments. FNMA conventional loan with collection accounts guidelines allows collection accounts not to be paid.

Which Home Loan Has The Most Lenient Guidelines For Homebuyers With Collections?

It is easier to get an approve/eligible per AUS on FHA loans versus conventional loans with a larger number of collection accounts. Conventional loans have the most strict conventional loan with collection accounts guidelines out of all mortgage loan programs. We will do a comparison and contrast a conventional loan with collection accounts and FHA Loan with collection accounts. In this article, we will discuss and cover Fannie Mae’s guidelines on conventional loan with collection accounts.

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Does FNMA Require Collections Be Paid For Conventional Loans For Second Homes?

Home buyers of second homes cannot qualify for government loans but are eligible for second home conventional loans. FNMA conventional loan with collection accounts second home mortgage guidelines requires any collection accounts and charged-offs great than $5,000 need to get paid at or prior to closing on second and/or vacation homes.

Conventional Versus FHA Guidelines on Collection Accounts

Conventional lending guidelines are much different than FHA mortgage lending guidelines with regard to unpaid collection accounts, charge-offs, tax liens, and judgments. All unpaid collection accounts, and charge offs, do not need to be paid per Fannie Mae Guidelines on owner-occupant homes. Tax liens and judgments need to be paid at or prior to closing. There is a maximum on the number of outstanding collections borrowers may have on investment property loans per Fannie Mae Guidelines On Collections.

FNMA Collection Account Guidelines on Second Homes and Multi-Family Homes

Fannie Mae and Freddie Mac do not require Borrowers to pay outstanding collections and charged-off accounts on single-unit owner-occupant homes.  It does not matter on the outstanding balance of collections and/or charged-off accounts. Unlike FHA loans, taking 5% of the outstanding collection balance and using that number as a hypothetical debt does not apply to conventional loan with collection accounts as it does with FHA loans.

What Are The Max Collections Allowed on Second Homes and 2-to-4 Multi-Family Homes?

The unsatisfied amount of the collection account balance does not matter on conventional loans for owner-occupant primary homes. However, homebuyers who are purchasing two to four-unit owner-occupied primary and/or second homes have a maximum amount of collection account balance they can have. Mortgage borrowers who are financing second homes, and/or multi-family two to four unit homes must pay off any outstanding collection accounts and/or charge off accounts if the amount is over $5,000. The maximum amount of unsatisfied collection account balance they can have is $5,000 or lower.

FNMA Guidelines on Conventional Loan Collection Accounts on Investment Homes

FHA, USDA, and VA loans are for owner-occupant primary home financing only. You cannot finance second-home and/or investment property with government-backed mortgages. Fannie Mae and Freddie Mac mortgage agency guidelines allow second home and investment property financing with conventional loans. FNMA conventional loan collection accounts guidelines do not have a maximum collection account loan balance on primary homes.

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FNMA Collection Guidelines on Second Homes Versus Investment Homes

Second homes and two to four-unit multi-family homes conventional loan with collection accounts mortgage guidelines have a maximum unsatisfied collection account loan balance of no greater than $5,000. FNMA conventional loan collection accounts mortgage guidelines on investment properties have stricter restrictions on unpaid collection accounts. Investors purchasing investment homes must pay off individual collection accounts and/or charge off accounts that are equal to or greater than $250 per individual creditor. Collection accounts that total more than $1,000 need to be paid in full on conventional investment loans.

Do Collection Accounts Affect DTI on Conventional Loans?

Unlike FHA loans where 5% of the oustanding collection account balance on collections over $2,000 is used for debt-to-income ratio calculations, collections on conventional loans do not count towards DTI calculations. This holds true no matter how large the collection account balance. Whether the collection account is a medical or non-medical collection account, there is no 5% of the collection balance used for DTI rule on conventional loans. As mentioned in other paragraphs, you do not have to pay unsatisfied collections on owner-occupant primary homes.

HUD Guidelines on Debt-To-Income Ratio on Collection Accounts

All owner-occupant primary government and/or conventional loan programs do not require collections and charged-off accounts to be paid to qualify for home loans. However, each loan program has its own independent algorithm programmed into the automated underwriting system. FHA loans has the most lenient guidelines on collection accounts and other derogatory credit tradelines programmed on the algorithm of the automated underwriting system (AUS). Just like Conforming loans, HUD guidelines do not require collection accounts to be paid on FHA likes. Medical collection accounts are totally exempt. For non-medical collection accounts here is what the guidelines are. If the aggregate unpaid balance of collection accounts is greater than $2,000, then 5% of the unpaid collection account balance will be used towards debt to income calculations.

Do Collections Count Toward DTI on FHA Loans?

One of the most frequently asked questions from first-time homebuyers with collection accounts is do unsatisfied collections count towards DTI on FHA loans? The answer is YES. HUD, the parent of FHA, is the only loan program that requires 5% of the outstanding balance on all non-medical collections to be used as a hypothetical debt for debt-to-income ratio calculations. The 5% rule does not count for non-medical and charged-off accounts. The 5% of unsatisfied collection account balance counting towards DTI does not apply for conventional, USDA, and VA loans. HUD is the only agency with this policy.

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Will Collections Count Toward DTI on FHA Loans With a Payment Agreement?

5% of the balance on non-medical collection accounts is used towards DTI on FHA loans. However, if you have a written payment agreement with the creditor, HUD allows borrowers to use the payment agreed upon on the written payment agreement with the creditor in lieu of the 5% of the outstanding balance. We will go over a case scenario on how an agreed payment with a written payment agreement between you and the creditor can lower your debt-to-income ratios on FHA loans.

Case Scenario on How Payment Agreement With Collection Agency Lowers DTI

Here is a case scenario: For example, here is a case scenario on how collection accounts impact the debt-to-income ratio on FHA loans:

• if a mortgage loan borrower has $20,000 worth of unpaid collection accounts
• then 5% of the unpaid $20,000 total aggregate collection account balance or $1,000 will be used to calculate the mortgage loan borrower’s debt to income ratios
• This is the case even though the $1,000 per month does not have to be paid
• HUD allows a written payment agreement arrangement with unpaid collection accounts in lieu of the 5% collection account balance calculation

How Can You Lower the 5% Collection DTI Debt on FHA Loans

As mentioned earlier, you can lower the 5% hypothetical debt off the collection loan balance used in DTI calculation on FHA loans by making a written payment agreement with the creditor. FHA will take either 5% or the payment amount settled with the collection agency in the written payment agreement. For example, if the mortgage loan borrower has a total unpaid collection account balance with a collection agency and/or creditor of $20,000:

• makes a written payment agreement with the creditor and/or collection agency for $300 per month
• that $300 per month will be used in lieu of the 5% of the $20,000, or $1,000, in the calculation of debt to income ratios

Fannie Mae and Freddie Mac do not have such a policy on conventional loans.

FNMA Guidelines For Bad Credit on Conventional Loans

FNMA has specific mortgage guidelines on bad credit. You can qualify for conventional loans with bad credit. However, FHA loans have the most lenient mortgage guidelines for bad credit borrowers. FHA mortgage lending guidelines are very generous with lending requirements for home buyers and homeowners wanting to refinance their current home loans. You can also qualify for conventional loans with less than perfect credit. We will go over FNMA conventional loan guidelines for bad credit.

• judgments
• tax liens
• other liens such as mechanics liens

HUD, the parent of FHA,  allows mortgage loan borrowers who have judgments to set up a written payment agreement with the judgment creditor or the Internal Revenue Service. Outstanding tax liens and judgments do not have to be paid off as long as they have a three-month seasoning before making payments. Borrowers can qualify for FHA, VA, USDA, and Conventional Loans with a written payment agreement and three months of payment seasoning.

Best Mortgage Options For Homebuyers With Collection Accounts

One of the most asked questions at Gustan Cho Associates is what mortgage options are best for borrowers with collection accounts. Although collection accounts are allowed on FHA, VA, USDA, and conventional loans, the best loan program for home loans for bad credit is FHA loans. HUD, the parent of FHA, has lenient agency guidelines on FHA loans. HUD’s algorithm to get an approve/eligible per the automated underwriting system is by far the most lenient than any other loan program. It is easier to get an approve/eligible per AUS one FHA loan with collection accounts, charge-offs, judgments, and tax liens than it is with VA, USDA, and conventional loans.

Best Mortgage Options For Homebuyers With Collection Accounts

Best Mortgage Lenders For Conventional Loan With Collection Accounts

Gustan Cho Associates are mortgage brokers licensed in 48 states. The team at Gustan Cho Associates are experts in helping borrowers on qualifying and getting approved for a conventional loan with collection accounts. FHA Loan programs may be the best bet in getting an automated underwriting system approval. with collections and other derogatory credit tradelines.  It is much easier to get an approve/eligible per automated underwriting system approval with multiple recent collections, late payments, charged-off accounts, and high debt to income ratio than other government and/or conforming loans. Government loans have more lax mortgage lending guidelines than conforming mortgages. If you have any more questions on qualifying for a conventional loan with collection accounts, please contact us at Gustan Cho Associates at gcho@gustancho.com or call us at 800-900-8569. Text us for a faster response. The team at Gustan Cho Associates are experts in working with homebuyers who need to get approved for a conventional loan with collection accounts.

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