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
- Charge off
- Included in bankruptcy
- Foreclosure (mortgages only)
- Repossession (cars or other similar assets)
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.
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