If the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the FHA mortgage lender must:
• verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds;
• verify that the FHA mortgage applicants has made payment arrangements with the creditor and include the monthly payment in the FHA mortgage applicants Debt-to-Income ratio (DTI); or
• if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the FHA mortgage applicants DTI.
Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the FHA mortgage applicants ability to pay all collection accounts, unless excluded by state law.
Unless the FHA mortgage lender uses 5 percent of the outstanding balance, the FHA mortgage lender must provide the following documentation:
• evidence of payment in full, if paid prior to settlement;
• the payoff statement, if paid at settlement; or
• the payment arrangement with creditor, if not paid prior to or at settlement.
For manually underwritten loans, the FHA mortgage lender must determine if collection accounts were a result of:
• the FHA mortgage applicants disregard for financial obligations;
• the FHA mortgage applicants inability to manage debt; or
• extenuating circumstances.
The FHA mortgage lender must document reasons for approving a mortgage when the FHA mortgage applicants has any collection accounts. The FHA mortgage applicants must provide a letter of explanation, which is supported by documentation, for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file.
