Getting a Home Loan Even if You Have Credit Problems
For example, home loan applicants who have had past collection activity are probably worried that the collection will automatically rule out home loan approval.
But if that collection activity is over a year old, you’ve made on-time payments ever since, and are actively working to improve your credit, you may not have as much difficulty getting a loan approved as you originally thought.
Borrowers may be worried about collection accounts, which are defined by the FHA and HUD as a loan or debt "submitted to a collection agency by a creditor."
If your lender finds collection account information, she must review that information to see how much money the collection is trying to collect. Believe it or not, the size of your collection account debt could make a big difference.
Why? Those with debt below a certain threshold may not be subject to the same level of scrutiny. The FHA Loan Handbook, HUD 4000.1, states:
“If the credit reports used in the TOTAL Mortgage Scorecard analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must verify that the debt is paid in full at the time of or prior to settlement using acceptable sources of funds.”
The loan officer is also required by FHA regulations to ensure the borrower has made a payment arrangement that is acceptable to the creditor(s).
In some cases, the lender may be required to do a debt-to-income ratio calculation using a certain percentage of the outstanding balance; in other cases the lender may simply be able to submit the actual monthly payment amount as part of the borrower’s debt ratio.
There are factors that can make this process a bit more complex, especially if you live in a Community Property state where state law dictates the financial responsibility for legally married couples who have entered into debts together as a couple.
HUD 4000.1 informs us, “Collection 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 borrower’s ability to pay all collection accounts, unless excluded by state law.”
Speak to a loan officer to get further clarification if you are not sure how this scenario would affect your ability to get loan approval.
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