Charge Offs
18 Jan

Buying a Home With A Charge-Off on Credit Report

FHA Charge-Off Home Loan program

Who this program is intended for:

Someone who has charged-off accounts reporting on their credit report.

The definition of a charge off from Experian Credit Bureau is; “When a creditor notifies credit bureaus that it has charged off a debt, it means the creditor has given up on trying collecting an unpaid debt. A charge off is a negative mark on your credit report.”

Having a charge off on your credit report is considered one of the worst credit situations possible, but it is not the end of the world. How did this charge off show up? The most common way is not paying on your account for six months or 180 days. The creditor at this point is saying they have failed to collect the debt, and considers this a loss on their books. However, this DOES NOT mean you do not have to pay the debt you owe (unless you file for bankruptcy and include that account).

Creditors still have every right to come after you for their money. They have a few options available to collect; they can internally collect, or pass the debt off to a collection agency, and in some cases, file a lawsuit and/ or seek arbitration. This being said, you are still able to purchase your dream home!

What are the next steps? Contact a Mortgage Scenarios expert before you contact your creditor who issued the charge-off. This might seem like a counter intuitive approach, but if you do start a repayment plan, this could disqualify you from using this program. Your expert will verify your credit report with the 4000.1 FHA Handbook, and start your pre-approval from there!

Guidelines on Program with NO Lender Overlays:

When looking into mortgage loan programs that deal with Charge-Off accounts it is wise to know both the FHA Guidelines as found in the HUD 4000.1 Handbook along with any additional guidelines your lender requires, also known as “Lender Overlays.” A lot of lenders offer this program with FHA that allows you to purchase a home with charged-off accounts on your credit report, but with strict lender overlays, it makes it difficult, sometime impossible, to qualify.  Lender Overlays are intended to minimize the risk of lenders by obtaining higher quality borrowers who can satisfy the increased requirements.  For example, an FHA Loan with 3.5% down requires a 580 FICO score but if you are working with a lender who is requiring a 640+ FICO this is a Lender Overlay that can work against you. You need to make sure the lender you work with has NO lender overlays and directly underwrites to the 4000.1 handbook Guidelines with charged-off accounts just like we do here at Mortgage Scenarios:

  • Waiting Period: None
  • FICO Score: 500 and above
  • Down Payment Requirements: A minimum FICO score of 580 is required to obtain an FHA Loan with a 3.5% down payment.  If your FICO score is 500-579 you will be required to have a 10% down payment plus compensating factors in order to obtain a mortgage. – talk to our loan officer about your compensating factors.
  • Debt-To-Income Ratio: FHA Loan debt-to-income or DTI ratios are based on the FICO score used to get approval of the loan.  If your FICO score is 620+ you are able to have up to a 56.9% DTI ratio, however if your FICO score is below 620 you will only be able to carry a 43% DTI ratio. This is a case by case scenario and there certain items you can and cannot exclude from this calculation. Please talk to our licensed loan officers to go over your scenario as they will work with you to get this done.
  • Loan Limits:FHA Loan Limits vary by the different counties across your state and can range from $275,665 to $636,150. Have one of our licensed loan officer check your county limits to confirm.
  • Other restrictions:If you included a mortgage in your bankruptcy and now looking to purchase another home, you would need to either qualify for both mortgages or make sure you filed a deed in lieu/short sale/foreclosure which then will have other waiting periods in order to qualify.

Documentation Needed:

 Here is a list of the standard documentation you should expect to have ready in order to complete your application. Note: This is for W2 wage earners and/or fixed income.

  • Last 2 years of Federal Tax Returns (All pages and Schedules)
  • Last 2 years of 1099’s and/or W2’s
  • Most recent paystub (30 days worth)
  • Any fixed income monthly statement (awards letter/pension statement)
  • 2 months of bank statements and/or all liquid assets accounts
  • Copy of driver’s license

Common Concerns/ FAQ:

 How do I know if my delinquent account is a charge-off or a collection?

    • Simply contact a expert who will provide you with a no-obligation IN FILE credit report. This is the credit report that all lenders are required to use for mortgages.
  • Is there a way to have a delinquent account into a charge-off?
    • No, this is up to the creditor and please keep in mind, you still owe this debt. If they do turn this debt into a “collection”, this will also hamper your ability to obtain a mortgage.

How We Differ From Other Lenders:

Over 70% of our clients have either been denied before due to Charge-Off accounts or other derogatory credit events or are in the process with another lender but not getting the service they deserve. We take the time upfront to fully understand your scenario and all of your short &long-term goals. If your scenario is complicated, we’re ready to listen and will be ready to develop a custom plan with the result being home ownership.  We value all of our clients and we will work around your schedule in order to make this process as simple as possible even if this means working after hours, weekends, and holidays if need be.  Reach out today and don’t waste any more time as we know homes can sell within days and there isn’t time to waste.  Let us do the hard work for you and limit as much stress as possible all the while making your new home a reality.

Post Your Comment

Your email address will not be published. Required fields are marked *