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FHA Loans with No Lender Overlays
Hi Gustan Cho Associates Team,
My name is Bruno Apolsky. I was referred to your firm because you specialize in FHA financing with no lender overlays.
I am looking to purchase a new primary residence in Mountain House, CA, as I recently relocated to the area for work. Here is a summary of my financial profile:
- Credit Score: Experian score is 615 not sure my home loan score.
- Collections:
- I have 12+ open non-medical collection accounts (credit cards and personal loans).
- My Wife has 12+ Open non medical collection and she will be Co applicant.
- Rental History: Currently paying $3,500/month in rent with a solid on-time record since October-2022
- Existing Property: I own a home in Sacramento that is currently rented out to tenants (the rent covers/offsets the mortgage). Because my move to Mountain House/Fremont is over 100 miles away due to job relocation, I am purchasing the Mountain House home as my primary residence and plan to use the Sacramento rental agreement/Schedule E to offset its mortgage payment in my DTI.
My Goal:
I would like to ge
1- t pre-approved for an FHA loan using the standard HUD 5% DTI calculation rule for my collections (without paying them off) and offset my Sacramento property debt using my current rental agreement/tax schedule.
Could a loan officer please review my scenario and guide me on the next steps to submit my documentation?
Thank you,
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1 Reply
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Hi Sung,
Thank you for contacting Gustan Cho Associates and providing these details. Based on what you’ve shared, your situation is worth considering for FHA financing. Having several non-medical collection accounts does not mean you or your wife have to pay them off before closing.
We need to review a few key details before we can give you a pre-approval.
FHA Financing With Multiple Non-Medical Collections
FHA does not automatically require outstanding non-medical collection accounts to be paid in full.
Under HUD guidelines, when the applicable outstanding collection balances total $2,000 or more, the lender generally has three ways to address them:
- The collections can be paid.
- A documented payment arrangement can be used, and the required monthly payment can be included in the debt-to-income ratio.
- If there is no payment arrangement, the lender may calculate 5% of the outstanding collection balance as a monthly debt and include that amount in the DTI calculation.
This last point is important. Many people refer to it as FHA’s “5% collection rule,” but it does not mean FHA simply adds 5% to your DTI. Instead, the lender figures out 5% of the outstanding collection balance and uses that as a monthly debt.
For example, if your non-medical collections add up to $20,000, then 5% of that is $1,000. This amount would be counted as a monthly liability when qualifying.
HUD’s current Handbook 4000.1 continues to allow this treatment rather than requiring every applicable collection to be paid before closing.
Because both you and your wife are applying, we need to check the collection balances on each of your credit reports.
We also need to find out if any accounts are charge-offs instead of collections, since FHA handles charge-offs differently. Medical collections are also treated differently than non-medical collections.
Your 615 Experian Score May Not Be Your FHA Mortgage Score
The Experian score you get from a credit-monitoring service may not match the score we use for your mortgage application.
For FHA purposes, the lender obtains a mortgage credit report and determines the FHA Minimum Decision Credit Score for each borrower. When there are multiple borrowers, FHA uses the lowest applicable MDCS among them to determine FHA eligibility.
We’ll need to get mortgage credit reports for both you and your wife to find out your actual qualifying score.
A 615 consumer score by itself does not tell us if you’ll qualify for the loan.
Your $3,500 Monthly Rental History Is a Positive Factor.
We’ll record your history of paying about $3,500 in rent each month on time since October 2022.
This can help if your file needs manual underwriting, because payment history, housing history, savings, credit habits, and reasons for any negative credit all matter in the review.
Still, we need to look at your full credit file. The number of collections by itself does not decide if the loan can be approved.
Using Rental Income From Your Sacramento Property
The Sacramento property is also an important part of your qualification. Rental income from other real estate can be considered if the HUD documentation requirements are met.
If the Sacramento property already has an established rental history reported on your tax returns, the underwriter may calculate qualifying rental income using Schedule E and the applicable FHA add-backs, such as depreciation, mortgage interest, taxes, insurance, and HOA dues where permitted.
If the property does not have enough rental history on your tax return, FHA uses different documents and calculations. Depending on your situation, this could include the current lease, an appraisal-supported market rent, equity verification, and usually 75% of the rental amount before subtracting the property’s housing costs.
We can’t assume that the full monthly rent will offset the Sacramento mortgage payment. First, we need to find out which FHA rental-income rule applies to your property.
The 100-Mile Relocation Rule Needs To Be Verified.
You mentioned relocating more than 100 miles because of employment.
That is particularly important because FHA has a specific requirement when qualifying rental income is being generated from a principal residence the borrower is vacating. HUD provides that the borrower must be relocating to an area more than 100 miles from the current principal residence, along with the applicable lease and rental paperwork requirements.
We’ll need the exact addresses for both properties.
Moving from Sacramento to Mountain House may not meet the FHA 100-mile rule, depending on the exact locations. If your job is moving you to Fremont, we’ll document the details and let underwriting decide how the HUD rule applies.
We need to confirm this before we can count the Sacramento rental income for your qualification. Here’s what we would need from you:
To proTo review your file, please have the following ready: most recent 30 days of pay stubs.
- Last two years of W-2s
- The most recent two years of federal income tax returns, if rental income is being used
- All applicable Schedule E forms
- Current Sacramento mortgage statement
- Property tax and homeowners’ insurance information for Sacramento
- Current executed Sacramento lease agreement
- Evidence of rental/security-deposit payments, if applicable
- Most recent two months of bank statements
- Employment offer, transfer letter, or records supporting the job relocation, if available
- Identification for both borrowers
- Authorization for a mortgage credit report
- Information concerning the outstanding collections for both borrowers
After we get your mortgage credit report, we’ll sort the accounts into collections, charge-offs, medical collections, disputed accounts, and other negative credit. Then we’ll see how each one affects your FHA qualification.
Bottom Line
Don’t think that having 12 or more collections for you and your wife means you can’t get an FHA mortgage.
FHA guidelines allow borrowers to qualify even with outstanding nonmedical collections, and you don’t always have to pay them off. The main factors are the total collection balance and the monthly payment calculated by FHA rules.
We may be able to use the Sacramento rental property to help you qualify, but first, we need to determine whether we can use your Schedule E rental history or whether the FHA rules for a recently vacated home apply.
It’s also important to document your $3,500 monthly rental history since 2022.
The next step is to complete a full FHA pre-approval review rather than relying solely on your Experian score. Gustan Cho Associates can review your complete file in accordance with FHA guidelines and determine whether the loan is acceptable as submitted or requires changes before you make an offer.
Thank you, Sung. We look forward to reviewing your situation.
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