Handling of Florida Collections, Foreclosures and Disputed Accounts.
Florida Collections and judgments may indicate a Florida mortgage applicant’s disregard for credit obligations and must be considered in Florida Mortgage Lenders approvals. The guidance below applies to FHA mortgage loans with collection, judgments and disputed accounts. Medical collections and charge off accounts are excluded from this guidance.
Applicable to Florida Mortgage Lenders FHA Manually Underwritten Loans:
The Florida mortgage lender must document reasons for approving a Florida mortgage when the
Florida mortgage applicant has collection accounts or judgments.
Regardless of the amount of outstanding collection accounts or judgments, the Florida mortgage lender must determine if the collection account or judgment was a result of:
the Florida mortgage applicant’s disregard for financial obligations;
the Florida mortgage applicant’s inability to manage debt; or
The Florida mortgage applicant must provide a letter of explanation with supporting documentation for each outstanding collection account and judgment. The explanation and supporting documentation must be consistent with other credit information in the file.
Collection Accounts- FHA does not require collection accounts to be paid off as a condition of Florida mortgage approval. However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect the Florida mortgage applicant’s ability to repay the mortgage. To mitigate this risk, FHA is requiring a capacity analysis of collection accounts with an total cumulative balance equal to or greater than $2,000, as outlined below.
If the total outstanding balance of all collection accounts for all Florida mortgage applicant’s is equal to or greater than $2,000, the Florida mortgage lender must perform a capacity analysis as detailed below. Unless excluded under state law, Florida collection accounts are included in the cumulative balance. If evidence of a payment arrangement is not available, the Florida FHA mortgage lender must calculate the monthly payment using 5% of the outstanding balance of each collection, and include the
Medical Collection Accounts- All medical collections and charge off accounts are excluded from this guidance and do not require resolution.
Debt To Income Ratio Analysis- Capacity analysis includes any of the following actions:
• At the time of or prior to closing, payment in full of the collection account (verification of acceptable source of funds required).
• The borrower makes payment arrangements with the creditor.
If the Florida mortgage applicant has entered into a payment arrangement with the creditor, a credit report or letter from the creditor verifying the monthly payment is required. The monthly payment must be included in the borrower’s debt-to-income ratio.
• If evidence of a payment arrangement is not available, the Florida mortgage lender must calculate the monthly payment using 5% of the outstanding balance of each cumulative collection on the credit report over $2000, and include the monthly payment in the borrower’s debt-to-income ratio.
Florida Judgment Accounts - FHA requires judgments to be paid off before the mortgage loan is eligible for FHA insurance. An exception to the payoff of a court ordered judgment may be made if the Florida mortgage applicant has an agreement with the creditor to make regular and timely payments. The Florida mortgage applicant must provide a copy of the agreement and evidence that payments were made on time in accordance with the agreement, and a minimum of three months of scheduled payments have been made prior to credit approval.
Florida mortgage applicant are not allowed to prepay the 3 scheduled payments to meet the required minimum of three months of payments. Furthermore, Florida mortgage lenders are instructed to include the payment amount in the agreement in the calculation of the borrower’s debt-to-income ratio.
FHA mortgage lenders requires judgments of a non-purchasing spouse in a community property state to be paid in full, or meet the exception guidance for judgments above, unless excluded by state law.
FLORIDA COLLECTION ACCOUNTS IN DISPUTE-
FHA Disputed derogatory credit accounts are defined as follows:
• disputed charge-off accounts,
• disputed collection accounts, and
• disputed accounts with late payments in the last 24 months.
Disputed derogatory credit accounts of a non-purchasing spouse in a community property state are not included in the cumulative balance for determining if the mortgage application is downgraded to a “Refer”.
Non-derogatory disputed accounts are excluded from the $1,000 cumulative total.
Non-Derogatory Disputed Accounts and Disputed Accounts Not Indicated on the Credit Report.
Non-derogatory disputed accounts include the following types of accounts:
• disputed accounts with zero balance,
• disputed accounts with late payments aged 24 months or greater, and
• disputed accounts that are current and paid as agreed.
If a borrower is disputing non-derogatory accounts, or is disputing accounts which are not indicated on the credit report as being disputed, the Florida FHA mortgage lender is not required to downgrade the application to a “Refer.” However, the FHA mortgage lender must analyze the effect of the disputed accounts on the borrower’s ability to repay the loan. If the dispute
results in the borrower’s monthly debt payments utilized in computing the debt-to-income ratio being less than the amount indicated on the credit report, the FHA mortgage applicant must provide documentation of the lower payments.
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