How do collections and charge-offs affect you getting approved for a FHA mortgage.

It used to be that collections and charge-offs did not affect you getting an FHA mortgage, but with the new regulations, they can stop your approval in its tracks. Medical collections & charge-offs are still exempt to the new rules, they will not affect you except for your credit score going down.

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Now with the new rules any customer who has $2000 or more in non-medical collections or charge-offs has to use 5% of the balance in their debt to income ratios. As an example if you have a $3000 collection from a credit card your payment would be $150 even if the debt has been written off. So as you can see this new rule could stop you from getting an FHA mortgage because your debt to income ratios are too high. Every FHA mortgage is affected by this rule whether you get an automated approval (Fannie Mae DU & Freddie Mac LP), or you do a manual underwrite. If you are shopping for a mortgage and you know you have non- medical collections or charge-offs look for a lender that will allow higher debt to income ratios. Barclay Butler Financial can go up to 46.9% / 56.9% these are the highest debt ratios allowed by FHA. Most banks, mortgage banks & mortgage brokers do not go any higher than 45-50% debt to income ratios.

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