How can you qualify for a USDA loan with collection accounts?
While nobody wants a collection on their credit report, sometimes circumstances can lead to collection activity that may be outside of a person’s control.
If a collection accounts are on your credit, is it still possible to qualify for a USDA loan?
In today’s video I will explain how it can be possible to qualify for a USDA loan with outstanding collections and break down the qualifying steps required.
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As a starting point, updated USDA guidelines require the following to be considered when analyzing open collection accounts:
- Determine if the total outstanding balance of all collections accounts of all applicants is equal to or greater than $2,000.
- Remove all medical collections and all types of charge off accounts from the total balance.
- Medical collections and charge off accounts must be clearly identifiable on the credit report.
- If the remaining outstanding balance of collection accounts are equal to or greater than $2,000, any of the following actions will apply:
- Payment in full of all collection accounts at or prior to closing.
- Payment arrangements are made with each creditor for each collection account remaining outstanding.
- A letter from the creditor or evidence on the credit report is required to validate the payment arrangements.
- The agreed upon monthly payment for each outstanding collection account will be included in the borrower’s debt-to-income ratio.
- If a payment arrangement does not exist, the lender will take each collection and calculate 5% of the outstanding balance to represent the monthly payment to be included within the debt-to-income ratio.
USDA Guidelines provide additional guidance as follows:
“Paying an outstanding collection account is not justification, in itself, that would establish an applicant’s willingness to meet obligations in an acceptable manner.”
“Payment of the collection account may cause the depletion of cash resources that may otherwise be available as reserves or for closing costs.”
Also, it is important to remember that records of irregular payment, lack of satisfactory repayment arrangements, and recent paid in full accounts will all be taken into consideration when reviewing for USDA loan approval
In summary, regardless of the type of collection, a collection is a collection and it will be factored into the credit score, but as discussed above, USDA guidelines permit underwriting flexibility when medical collections are clearly identified on one’s credit report.
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