Do Mortgage Lenders require repossessions to be paid off Mortgage Qualifying? 

For FHA only If the credit used in the analysis show cumulative outstanding repossession account balances of $2,000 or greater, the lender 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 FHA or VA mortgage applicants have made payment arrangements with the creditor and include the monthly payment in the mortgage applicantDebt-to-Income ratio (DTI); or 
•      if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each repossession and include the monthly payment in the mortgage applicantDTI.  

repossession 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 mortgage applicant ability to pay all repossession accounts unless excluded by state law.   Unless the lender uses 5 percent of the outstanding balance, the lender must provide the following documentation: 
•     evidence of payment in full, if paid prior to settlement; 
•     the payoff statement, if paid at settlement; or 
•     the payment arrangement with the creditor, if not paid prior to or at settlement.  

For manually underwritten loans, the lender must determine if repossession accounts were a result of: 
•     the mortgage applicant disregard for financial obligations; 
•     the mortgage applications ability to manage debt; or 
•     extenuating circumstances.  

The mortgage lender must document reasons for approving a mortgage when the FHA or VA mortgage applicants have any repossession accounts. The FHA or VA mortgage applicants must provide a letter of explanation, which is supported by documentation, for each outstanding repossession account. The explanation and supporting documentation must be consistent with other credit information in the file. 

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