FHA Collection Account Rules Change

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FHA Collection Policy
FHA Collection Policy

FHA is at it again. This time, HUD/FHA changed the way they view collection, charge off,  judgement and disputed accountsFHA’s new rules (below) apply to FHA loans as of October 15, 2013.

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What is FHA Changing?

Collections and Charge Off Accounts

Manually approved FHA loans require borrower’s provide a written explanation for each collection (medical excluded).  In addition, FHA borrowers must submit documentation showing the collections are NOT the result of financial mismanagement.

Additional requirements exists when non medical collections total $2,000 or more for all FHA loans.  FHA borrower’s have 3 options in this case.

  1. All collection debt paid prior to closing
  2. Payment plan the payment must included in that borrower’s debt to income ratio
  3. 5% of the collection total included as a monthly payment in applicant’s debt to income ratio

All non-purchasing spouse’s non medical collections are part of the total in all community property states.

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FHA applicants must pay all judgments at or prior to closing.  However, there is one way around having to pay off all judgments.  When an FHA borrower has a payment agreement for the judgment(s) they can often skip having to pay it off.  As long as the borrower has made 3 monthly payments (or more) they do not have to pay it off.

It is important to note FHA borrowers cannot make one lump sum 3 month payment.  Instead, 3 months payments over a 3 month period need to be made.  In addition, lenders count the payment into the borrower’s debt to income ratio.

Lastly, all non-purchasing spouse’s judgments are part of the total in all community property states such as Arizona.

Disputed Accounts

In the past, borrowers with disputed accounts had their FHA loan application downgraded to a manual review.  After October 15th, 2013 FHA files are downgraded to a manual only when the derogatory disputed account total meets or exceeds $1,000.  Derogatory disputed accounts are defined as:

  • Collection accounts showing disputed
  • Charge off accounts showing disputed
  • Disputed accounts with late payments in the past 24 months

Underwriters still consider how the presence of the non-derogatory disputed accounts impacts a borrower’s ability to repay the loan.

By Jeremy House

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