Collection Accounts refers to an FHA mortgage applications’ loan or debt that has been submitted to a collection agency by a creditor.
For Collection accounts totaling over $2000: If the credit reports used in the analysis show the total cumulative outstanding collection account balances over $2,000 or greater, the FHA mortgage lender must do one of the following:
1. If a repayment record is NOT available, calculate the monthly payment using 5% percent of the outstanding balance of each collection and include the monthly payment in the FHA mortgage applications’ debt to income ratios
2. Verify that the collection account is paid in full at the time of or prior to settlement using an acceptable source of funds;
3. Verify that the FHA mortgage applications has made payment arrangements with the creditor and include the monthly payment in the FHA mortgage applications’ Debt-to-Income ratio (DTI);
4. Collection accounts must be included in the $2,000 cumulative balance and analyzed as part of the FHA mortgage applications’ ability to pay Unless the FHA mortgage lender uses 5% percent of the outstanding balance, the FHA mortgage lender must provide the following documentation:
• the payment arrangement with the creditor, if not paid prior to or at settlement. evidence of payment in full, if paid prior to settlement;
• the payoff statement, if paid at settlement; or
For manually underwritten loans, the FHA VA mortgage lender must determine if collection accounts were a result of:
• the FHA mortgage applications’ disregard for financial obligations;
• the FHA mortgage applications’ inability to manage debt; or
• extenuating circumstances.
The lender must document reasons for approving a mortgage when the FHA mortgage applications have any collection accounts. The FHA mortgage applications must provide a letter of explanation, which is supported by documentation, for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file.
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