When a debt is not paid, it may go into collections or become a charge off. If an account is in collection status, it means the creditor is still attempting to collect the money. A charged-off account means the creditor has written off the debt and is no longer to collect. Just because the creditor is no longer collecting the debt, it is still a big negative on a credit report and will affect mortgage qualification. However, buying or refinancing a home with either collections or charge offs is still possible. Actually, FHA loans are very lenient in these cases.
How Does a Debt Become a Charge Off?
Going late on a debt has several levels. Each derogatory mark hurts a credit score, and the further down the list, the worse it gets. Even though older late payments and other derogatory accounts affect a credit score less than a recently reported item. Below are the most common ways a debt may report to the credit bureaus.
- 30 days late
- 60 days late
- 90 days late
- 120+ days late
- Collection
- Charge off
- Included in bankruptcy
- Foreclosure (mortgages only)
- Repossession (cars or other similar assets)
- Judgment
Any of the above may start one way and eventually become a charged off account. Once a debt becomes severely past due, the creditor has a decision to make. Options usually include filing a collection, judgment, or charging off the account.
FHA Charge Off Guidelines
As mentioned, every loan scenario is different. Even though a charge off is negative, it has been factored into a credit score. Normally FHA loans will not require that a charged-off account be paid off to close. However, recency plays a factor here. The most important credit history is the most recent. If the charge off is from the last 12 – 24 months, it may cause an FHA loan to be denied. However, if the charge off is from more than 2 years ago, you may still close on your FHA loan.
FHA Guidelines for A Collection Previously Reported as a Charge Off
If a previously charged-off account moves to reporting as a collection, FHA will require us to use FHA collection guidelines. Often this means paying off the collection or calculating a payment to be used in the debt to income ratio.
The Bottom Line
If you have a credit issue that may require an FHA manual underwrite, we have potential solutions. Contact our experts today to explore loan options and determine the best course of action for financing your future home.
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By OVM Financial , Can I Buy a Home With a Charge Off?
