Repossession is a collective term used to describe when
- the actual owner of the item that you have either rented, leased or borrowed takes the item back, either with or without compensation, or
- when a creditor or lienholder takes possession of an item from its registered owner that was used as collateral for a loan.
Repossession, colloquially known as “repo” for short, is a “self-help” type of action in which the party having the right of ownership of the property in question takes the property back from the party having right of possession without invoking court proceedings. A car may then be sold by either the financial institution or third-party sellers. The extent to which repossession is authorized, and how it may be executed, greatly varies.
When a lender cannot find the collateral, cannot peacefully obtain it through self-help repossession, or the jurisdiction does not allow self-help repossession, the alternative legal remedy to order the borrower to return the goods (prior to judgment) is replevin.
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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