FHA Charge Off Guidelines And Mortgage Process

In this blog, we will discuss and cover FHA charge off guidelines and the mortgage process with bad credit. FHA Charge Off Guidelines state that borrowers can qualify for FHA Loan with charge off accounts, no matter how large the charge off accounts is.

There are two types of FHA Charge Off Guidelines:

1. Non-mortgage FHA Charge Off Guidelines
2. Mortgage FHA Charge Off Guidelines

In this article, we will cover and discuss qualifying for an FHA loan with outstanding charged-off accounts.

What Are Charge Off Accounts

Charge Off Accounts are very common. A Charge Off Account is when a creditor deems the debt uncollectible and writes it off from their books. When a consumer defaults on his or her debt obligations, the creditor will try to contact the consumer. The creditor will try to call the consumer and will send them out letters demanding payment or for the consumer to contact them. Many consumers who owe debts and have debts in arrears normally ignore creditors’ phone calls. Often times they will not respond to collection letters by creditors.

How Long Will Creditors Try To Collect on Bad Debt?

A creditor will normally try collecting on their debts for 120 days. If creditors deem debt not collectible, it will often charge off the account and/or assign it to a third-party collection agency. Or sell the bad debt to a collection agency for a percentage amount of the outstanding debt. The collection agency will again try to collect on the consumer by making attempts to contact them and/or mailing out collection letters. Collection agencies hope the consumer will respond. Many times, creditors will just charge off the credit account and write it off as a loss.

How Does Charge Off Accounts Affect My Chances Of Getting FHA Loan

FHA does not require charge-off accounts to be paid. Charged off accounts will not count any charge off accounts in the calculation of debt to income ratios. This holds true no matter how much the charge off account is. Medical charge off accounts and non-medical charge off accounts are treated the same. Both do not matter when qualifying for FHA loans.

Lender Overlays on Charged-Off Accounts

Many banks and lenders will have mortgage lender overlays on charge-off accounts. Lenders with overlays will not accept any borrowers with charge-off accounts. This is even though FHA does not care about charge-off accounts. Lender overlays are requirements that banks and mortgage lenders set on top of the minimum FHA Guidelines set by the United States Department of Housing and Urban Development, also known as HUD. HUD is the parent of the Federal Housing Administration, also known by most as FHA. An individual bank and/or mortgage company can require that a charge-off account be paid off in order for them to accept borrowers. This holds true even though FHA does not require it. This is called a lender overlay.

FHA Charge Off Guidelines And Credit Disputes

HUD allows charge off accounts by borrowers. Lenders can ignore charge-off accounts.  Mortgage lenders with no overlays do not count charge-off accounts in the debt-to-income ratio calculations. However, FHA Charge Off Guidelines state borrowers cannot have any credit disputes on charge-off accounts All credit disputes from charge-off accounts need to be retracted.

Credit Disputes During the Mortgage Process

There cannot be any credit disputes retracted on the borrower’s credit report. Mortgage loan originators need to carefully review borrowers’ credit reports to make sure there are no credit disputes on charge-off accounts prior to issuing a mortgage loan pre-approval letter. Retracting credit disputes during the mortgage approval process could result in the credit scores of the borrower dropping. Can jeopardize borrower meeting the minimum credit score requirements to qualify for an FHA loan.

FHA Charge Off Guidelines On Mortgage Charge Offs

FHA Charge Off Guidelines on mortgage charge offs are different than regular charge off accounts. There is a three-year waiting period after the charge-off date of the mortgage loan and/or three year period after the recorded date of the foreclosure, whichever is the later date. Most foreclosures happen prior to the mortgage charge-off date so the mandatory waiting period will be three years from the charge-off date to qualify for an FHA Loan. However, if the foreclosure and/or date of the sheriff’s sale happened after the mortgage charge-off date, then the waiting period is three years from the date of the sheriff’s sale. Or date of the recorded date of the foreclosure to qualify for an FHA loan.

How Does Charged-Off Accounts Post on Credit Bureaus

All charge-off accounts, including mortgage charge-offs, have balances reported on the consumer’s credit report. Many lenders will tell borrowers they need to get the mortgage charge off balance removed or get a zero balance letter from their lender. This will not happen. The loan officer does not know how to read credit reports. All charge offs have balances on them and that balance reporting on the credit report is the charge off amount. Mortgage charge-offs apply for both first and second mortgages.

Qualifying For FHA Loans with Charged-Off Accounts

Borrowers with charge off accounts and/or mortgage charge off accounts and are told they do not qualify for an FHA Loan due to the charge off accounts, please look no further and contact us at 800-900-8569 or text us for a faster response. Or email us at alex@gustancho.com. We are available 7 days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.