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Rules about Collections, Tax Liens and Judgments That Will Affect Your Mortgage Loan Approval

May 10, 2014

Credit Report

Many people assume they will get denied for a home loan so they never try. FHA allows those with 500+ credit scores to buy a home with 10% down and for those with a score of 580+ or higher the minimum down is only 3.5%. Besides using your savings for your down payment, you can also use upcoming payroll deposits, tax refunds, gifted funds from family and your employer, and possibly even qualify for a county or city down payment assistance (up to $70,000). Ask one of our agents to see if you qualify.

One great benefit of working with PMC is that we offer a free credit analysis to ensure you have the highest possible score to get the best interest rate.  Many people are being proactive and reviewing their credit report (receive your free annual credit report from www.annualcredireport.com) prior to applying for a loan.  You can email us your report (info@pmccanhelp.com) to see what may be required to get your loan approved.  In some cases, collections, charge offs, tax liens, judgments and/or other creditors can be paid at closing, but it would be best to do this prior to applying for your home loan so that is has been updated on your credit report.

Collections 

Those people that are trying to improve their credit often pay off old collections that are older than a year, but fail to realize that this will cause the account to re-age (update last activity date) and drop their credit scores. Collections will stay on your credit report for 7 years. If you have any open collection accounts showing up on your credit report, certain lenders will allow you to leave those Collection Accounts Unpaid at Closing if the balance are less than $1000 and over 2 years old.

Disputed Accounts 

There are more and more disputes showing up on new applicants credit reports, which can take up to 90 days to resolve.  It is in your best interest to make sure that all open disputes are resolved, settled or deleted from the credit report prior to submitting your loan application to ensure a smooth and on time closing. Paying “down” balances on disputed accounts and collections is not an acceptable resolution of accounts.

Many people fail to close the disputes if they don’t agree with the outcome.  The most recent changes were made by HUD noted on FHA Mortgagee Letter 12-10, which explains the cancellation of the noted on the Mortgagee Letter (ML) 2012-3, which was to become effective July 1, 2012-“Handling of Disputed Accounts, Public Records FHA Total User Guide Chapter 2, and Handbook 4155.1 4.C.2.e, Paying off Collections and Judgments.” HUD: FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.

Judgments 

Judgments and Tax Liens that show up on public records will stay on your credit report for 10 years and normally will need to be paid in full, settled or deleted.  Per HUD an exception to the payoff of a court-ordered judgment may be made if the borrower has an agreement with the creditor to make regular and timely payments, and provides documentation indicating that a minimum of three months payments have been made according to the agreement. The monthly payment must be included in the borrower’s debt-to-income ratio.  Examples of acceptable documentation to support the resolution of disputed accounts or the payoff of accounts would be a letter from the creditor outlining the terms of the payment arrangements, or verifying payoff of debt, cancelled check(s), or a supplement to the credit report verifying payoff or payment arrangements.  Ask the lender if they will allow this, because they may have their own credit overlay guidelines that state otherwise.  Some lenders will also allow open tax liens with the proof of an installment agreement and three months of payments made on time.

Email us your loan scenario at info@pmccanhelp.com or before you get a Hard Money Loan, give us a call at 800-385-3657.

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