Do collections need to be paid off for to qualify for a mortgage? NO
A Collection Account refers to an FHA mortgage applicants loan or debt that has been submitted to a collection agency by a creditor.
If the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the FHA mortgage lenders must:
- If a payment arrangement contact has been executed, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the FHA mortgage applicants debt to income ratio.
- 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 mortgage applicant has made payment arrangements with the creditor and include the monthly payment in the FHA mortgage applicants Debt-to-Income ratio (debt to income ratio); orCollection 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 FHA mortgage applicants ability to pay all collection accounts unless excluded by state law. Unless theFHA mortgage lenders uses 5 percent of the outstanding balance, the FHA mortgage lenders 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 FHAA mortgage lenders must determine if collection accounts were a result of:
• the FHA mortgage applicants disregard for financial obligations;
• the FHA mortgage applicants inability to manage debt; or
• extenuating circumstances.
the FHA mortgage lenders must document reasons for approving a mortgage when the FHA mortgage applicant has any collection accounts. The FHA mortgage applicant 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.