Mortgagee Letter 2012-3 make changes to how FHA handles collection accounts, judgments, and disputed accounts on a borrower’s credit report.
Collections:
As a condition of mortgage approval, a borrower must pay off all collections that are less than 2 years old. Also, if the outstanding balance of all collections that are over $1,000, the borrower must pay off all collections in excess of $1,000 at or prior to closing. Charge-offs are not included in the $1,000 limit.
An acceptable alternative to paying off the collections is to enter into a payment agreement with the creditor and show a minimum 3-month payment history. These monthly payments must be added to the borrower’s liabilities and included in their debt to income ratios.
Judgments:
All court-ordered judgments must be paid off at or prior to closing. An acceptable alternative to paying off the judgments is to enter into a payment agreement with the creditor and show a minimum 3-month payment history. These monthly payments must be added to the borrower’s liabilities and included in their debt to income ratios.
Disputed Accounts on Credit Report:
Provided the mortgage application is approved by the automated underwriting system, the borrower’s application is no longer required to be referred to a DE underwriter for manual underwriting provided these accounts meet the following conditions:
· The total outstanding balance of all disputed accounts are less than $1,000 and
· Disputed accounts/collections are aged two years from last activity.
If the disputed accounts are greater than $1,000 or less than two years old they must be paid at or prior to closing.
Disputed accounts due to identity theft, credit card theft, or unauthorized use will be excluded from the $1,000 limit. Borrower must provide proof that they filed and identity theft and/or police report to dispute the fraudulent charges
An acceptable alternative to paying off the disputed accounts/collections is to enter into a payment agreement with the creditor and show a minimum 3-month payment history. These monthly payments must be added to the borrower’s liabilities and included in their debt to income ratios.
Note: Paying “down” of balances on collections and disputed accounts/collections to reduce the balance to below $1,000 is NOT an acceptable resolution of accounts.
These changes take effect for all FHA case numbers assigned on or after April 1, 2012.
It is always a good idea to contact me as soon as you decide you are going to purchase a home. We can check your credit report and see if there are any issues that can be taken care of ahead of time. I can be contacted at 708-473-7688 or BarkerLoans@gmail.com.
