You can get approved for a mortgage loan with unpaid charge-offs on your credit reports. FHA loan programs allow charge-off accounts but lenders may have their own requirements which put a cap on the charge-off amount or require the charge-off be paid.
Question: I went through a divorce which resulted in a foreclosure and numerous very large dollar charge offs where the statute of limitations has expired. All the charge off are set to drop off starting in July 2018 through January of 2019. I am trying to determine if it would be better to wait out the year and get low interest low down-payment or attempt to obtain a higher interest loan with 20 % down-payment now with hopes of refinancing later. I am concerned that I may miss the current real estate appreciation rebound. I also am concerned that I may not be able to get higher interest rate loan with 20% down payment because of the numerous large dollar charge off. My low FICO score is 650. Thanks for any insight you can share.
This is a tough one because I can understand you wanting to get in on the real estate market now. But I can only offer some points for your consideration to get approved for a mortgage loan with unpaid charge-offs:
- You have a good credit score, down payment and income to pay a higher rate loan. This is a plus for pursuing real estate now.
- FHA mortgage loans provide the best loan program for borrowers with prior credit issues and for borrowers looking for a bad credit mortgage loan. They only require a 3.5% down payment and allow borrowers to have unpaid collection and charge-off accounts.
- However, even though FHA guidelines do not require charge-offs of any amount be paid as a condition for getting a loan, lenders that offer the FHA loan program can set stricter lending requirements beyond the FHA guidelines which are called FHA Lender Overlays.
- Some FHA mortgage lender overlays will require charge-offs to be paid. While some lenders set caps on the charge-off amount, for example: One lender may allow a charge-off to remain unpaid as long as it doesn’t exceed $5,000. Another lender may have a cap of $20,000 of unpaid charge-offs.
- If you decide to pursue a mortgage loan now, the lender will more than likely require that you provide a detailed letter of explanation of the charge-offs, any late payments or collection accounts. Approval will not be cut and dry. It may take you jumping through many hoops due to the charge-offs.
- Lenders will also consider your debt-to-income ratio. Lenders will typically consider your major monthly debts including things like credit cards, car loans, student loans and the new mortgage perhaps even childcare and child support in comparison to your income. FHA loans do allow a higher debt-to-ratio income.
As you can see, a lot goes into the process to get approved for a mortgage loan with unpaid charge-offs on credit reports. The best advice I can offer, if you want to purchase real estate now, is to sit down with a mortgage lender in your area to evaluate your credit files for pre-approval. Your income, assets and credit will be reviewed and a good mortgage lender will provide you with the best course of action to take after running your information through an automated underwriting process.
Plus, there's an advantage to using a local mortgage lender. When working with a local mortgage lender, credit union or bank, they oftentimes have access to mortgage loan programs available to your specific area that cater to credit reports with blemishes. If you go forward now, you may have some challenges to overcome but it's possible.
A healthy 20% down payment along with a low debt-to-income ratio can get you approved but just be prepaid to offer extensive documentation and letters of explanation.
Best of luck to you,