What You Need to Know About Debt Collection
The answers are found at the HUD official site and you might be surprised to learn that there is a provision in the rules that lets a lender (depending on circumstances) approve an FHA mortgage loan even if there are debt collections on the record.
According to HUD.gov, “The lender must document reasons for approving a mortgage when the Borrower has any collection accounts. The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding collection account.”
In such cases, the borrower’s letter of explanation and supporting documentation “must be consistent with other credit information in the file” which means it is very important to resist the temptation some might feel to be “economical with the facts” when submitting such documentation.
Your loan officer is required to follow up on any seeming inconsistencies between the letter and the record.
What must the lender do if she finds a collection action on your account when processing your mortgage loan application?
According to HUD, when a Borrower’s loan or debt that has been submitted to a collection agency by a creditor, the lender is required to take specific steps if the collection account balances are greater than a certain dollar amount ($2,000 at the time of this writing).
If so, the lender is required to take several steps:
- Insure the debt has been paid in full on or before the settlement “using an acceptable source of funds;”
- Document payments have been made and include them in the applicant’s Debt-to-Income ratio (DTI); or
- If a payment arrangement is not available, calculate the monthly payment “using five percent of the outstanding balance of each collection” and add the monthly payment information to the debt-to-income ratio.
As you can see, having a collection on your record is not necessarily a barrier to loan approval, but if you are planning on purchasing real estate, or want to hire a broker or realtor to help you, make sure you understand what these rules mean and how you can take steps ahead of your loan application to minimize delays in getting personal statements written, checking your credit reports, etc.
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