FHA LOAN WITH MEDICAL COLLECTIONS
Most collections or charge offs on your credit report will negatively impact your ability to qualify for a mortgage. In some instances, you may still qualify but for a lesser amount if the unpaid balances are being counted against you in your back-end debt to income ratios (DTI).
Can I Get an FHA Loan with Medical Collections?
You can still get an FHA loan even if you do have medical collections. Although you still need to qualify for the loan based upon the rest of the FHA guidelines, the medical collections will not be held against you.
GUIDELINES – FHA LOAN WITH MEDICAL COLLECTIONS
These are the basic FHA guidelines related to “disputed” medical collections:
- Medical collections are exempt from how non-medical collections are treated.
- Medical collections will not be used in the DTI calculation regardless as to what those medical payment balances are.
- FHA Lenders should not take medical collections into consideration in any way when underwriting your FHA loan.
*One interesting aspect of this that is written in the guidelines is they refer to DISPUTED medical collections. We are not sure whether a lender will necessarily verify whether the collection was disputed. However, it would be a good idea to file a formal dispute for these collections prior to applying for an FHA loan. Do it in writing and keep a copy for your files.
HOW DO YOU KNOW IF YOU HAVE A MEDICAL COLLECTION?
You may not now that the collection exists until the lender runs your credit report. Doctors will place you for collection even for a small amount of $20. It is a good idea to periodically check your credit report for this type of activity and for anything else that may look to be incorrect.
Medical collections are the most common of all collection types. If you receive a collection letter, immediately file a dispute in writing. This may keep the collection off of your credit report. If the balance is very small, it actually makes sense just to pay it even if you do not believe you should.
FHA GUIDELINES ON NON-MEDICAL COLLECTIONS
FHA guidelines stipulate that you do not have to pay any non-medical collections that are on your credit report if their combined total is less than $2,000. However, those collections may count towards your debt to income ratio. As a result, you may need to pay some or all of these to qualify for your FHA loan.
If your non-medical collections are over $2000: (Example $5,000)
- 5% of the total collection balance (in the example, $250) will be used on your loan application as a monthly obligation. This will not actually have to be paid but it is used against you when qualifying AS IF you were paying it.
- You can instead agree to a monthly payment amount with the creditor or collection agency.
- If the agreed upon payment amount is $75 per month for example and you have that in writing, then the lender will only use $75 on your loan application as a monthly obligation.
This is an excellent way to help you to qualify for an FHA loan or to afford a more expensive home.
CAN I GET AN FHA HOME LOAN IF I AM DELINQUENT ON A FEDERAL DEBT?
If you have a federal debt appearing on your credit report, the lender needs to verify whether the debt is still outstanding. If the federal debt is valid and delinquent, then you will not be eligible for an FHA loan.
Examples of a federal debt:
- Prior FHA mortgages that may be outstanding and past due
- Federally backed student loans that are in default
- IRS debt that is owed
- Any other federal debt
If you are thinking of buying a home and you would like to qualify for an FHA loan, then speak with one of our FHA Lenders. They can help guide you on how to handle any medical or non-medical collections on your credit report in a way so that you can qualify for an FHA loan.
How does the FHA handle non-medical credit disputes?
If your non-medical credit disputes total $1,000 or more, then all of the disputes must be retracted and added back to your credit report as an open collection. Then, the loan must be underwritten with those payments in your monthly obligation calculations. Remember, medical credit disputes are exempt.
How does the FHA handle credit charge offs?
The FHA mortgage guidelines require lenders to ignore charge off collections as if they do not exist. However, if you have any credit disputes related to these charge offs, they must be reinstated and added to your monthly obligations in your FHA loan application.
Should I pay off the collections at closing?
If you plan to pay off your collections, then it is best to do it at the closing table. That can be part of the closing instructions and is the best way to handle it. The lender then is satisfied that the collections are being paid and closed. Also, doing it at closing will not negatively impact your credit score prior to close.
Are the interest rates higher for an FHA loan with medical collections?
The collections whether they are medical or non-medical will not impact your interest rates directly. However, your credit scores do have an impact on your FHA rate and as a result, the collections have an indirect impact on FHA interest rates.