Don’t Pay Off Your Collection Accounts

 In Qualifying for a Mortgage

Many people have late payments, collections, and charge-offs showing on their credit report.  Did you know that in many cases you do not have to pay off collection accounts and charge-off accounts to qualify for a mortgage?

Here’s what you need to know.

If you are getting a conventional loan (a non-government loan), chances are pretty good that your lender will need to comply with the Fannie Mae underwriting guidelines.  Here are the Fannie Mae guidelines for past-due, collection, and charge-off accounts:

If an account is reported as being past due (currently late), the account must be brought current before the closing.

If you are buying a one-unit, principal residence (a house you are going to live in), you are NOT required to pay off outstanding collection or non-mortgage charge-offs – regardless of the amount.

In the event that you buying a 2-4 unit owner-occupied or second home, collections and non-mortgage charge-offs totaling more than $5,000 must be paid in full prior to or at the closing.

If you are buying an investment property, individual collection and non-mortgage charge-off accounts equal to or greater than $250 and accounts that total more than $1,000 must be paid in full prior to or at the closing.

Most mortgage transactions are for one-unit principal residences.  That means most people who are applying for a mortgage do NOT need to pay off collection and charge-off accounts.  

If you have any questions, contact us and we’ll let you know the rules for your specific transaction.

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