Any negative mark on your credit can impact your score and reduce your chances of qualifying for a mortgage. This is especially true if you have debts that are late (past due), charged off, or currently in collections.
But the reporting of these derogatory accounts doesn’t disqualify you from getting a mortgage. You are still eligible for a conventional loan with charge-offs, collections, and judgments.
Heres how to deal with each of these types of accounts to meet conventional lending requirements.
Buying a house is an exciting milestone in life. However, charge-offs on your credit report can make it hard for you to buy a house. If you want to buy a house, you should know what charge offs are, how they affect your credit, and what you can do even if you have them.
What is a Charge Off?
A charge off occurs when you fail to make payments on a debt for an extended period, usually over 150 days past the due date. At that point, the creditor writes off the debt as a loss, closing the account. The debt still exists, you still owe the money, but the creditor no longer expects payment.
Charge offs severely damage your credit score. They stay on your credit report for seven years after the first time you missed a payment. A charge off keeps hurting your score even after you’ve paid it off.
Credit cards, personal loans, medical debt, utilities, cell phone contracts, and other debts are common accounts that can be charged off. Mortgages can also be charged off when they are foreclosed on.
How Charge Offs Affect Your Mortgage Application
Lenders view charge offs as a sign you are a high credit risk Multiple charge offs indicate a pattern of not paying debts, raising doubts about your ability to repay a mortgage.
Specifically, charge offs hurt your mortgage application in three ways:
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Lower credit score – Charge offs can drop your credit score significantly, even over 100 points. The lower your score the higher your mortgage rate and the harder qualifying becomes.
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Not so good history—Lenders look closely at charge-offs to figure out why you stopped paying. Repeated or unexplained charge offs are concerning.
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Debt-to-income ratio – Lenders may include monthly payments for unpaid charge off debts when calculating your DTI ratio. A higher DTI makes qualification difficult.
While one or two small charge offs may be understandable, multiple, large, or recent charge offs can seriously jeopardize mortgage approval.
Can You Buy a House With Charge Offs?
The good news is you can still buy a house with charge offs on your credit report. While challenging, it is possible if you take the right steps.
Each mortgage lender has their own charge off policies, but here are some common guidelines:
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Conventional loans – Allowed up to $5,000 in charge offs for primary home purchase. Investment properties cannot have any charge offs.
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FHA loans – Permits charge offs with explanation. Manually underwritten loans scrutinize further.
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VA loans – Generally allow charge offs with minimal impact.
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USDA loans – Permits charge offs under $1,000 if credit score above 640. Manually underwritten loans need explanation.
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Jumbo loans – Have no standard policy, each lender sets own rules. Most limit amount allowed.
While permitted, charge offs raise scrutiny and make approval more difficult. You increase your chances by taking proactive steps:
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Pay off charge off accounts if possible. This directly improves your credit report.
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Build savings for a larger down payment. More equity offsets credit risk.
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Rebuild your credit. Raise your score by paying bills on time and lowering debt.
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Explain charge off circumstances to your lender. Convince them it was a one-time event.
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Provide recent history of on-time payments. This helps offset past issues.
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Apply with a lender specializing in second chance mortgages if you have multiple charge offs.
The bottom line is charge offs make getting a mortgage tougher but not necessarily impossible. With prudent steps to improve your credit and down payment funds, you can still achieve homeownership. Be prepared for a thorough review and possible roadblocks, but persist and you can buy a house even with charge offs haunting your credit history.
Late Payments on Past-Due Accounts
First and foremost, all past-due debts must be brought current. These are accounts where the last payment was up to a few months ago, but the debt has not been forgiven or sent to a collection agency yet.
While its a good idea in any case, conventional lenders will require you to pay the arrears on past-due accounts before closing.
Past Due Mortgages
Past-due account rules do not apply to home loans that are behind in payments. If you have an existing mortgage that is 60 days or more past due, you are ineligible for a new conventional loan. Unlike other late payments, you cannot bring a past-due mortgage current to restore your eligibility.
According to conventional lending rules, borrowers whose mortgages have been reported as 60 days or more past due in the last 12 months are also not eligible.
Mortgages Which Have Been Charged Off
Lenders consider the mortgage charge-off to be a significant credit event on par with bankruptcy. You have to wait four years before you can get a regular loan after having a mortgage written off. This is different from other charge-offs on your credit report.
The waiting period may be reduced to two years in situations where a mortgage charge-off resulted from extenuating circumstances, including divorce, job loss, and medical debts.
Will a Charge Off Affect Buying a House
FAQ
Do charge-offs affect buying a house?
Yes, charge-offs can negatively impact your ability to buy a house. A charge-off indicates that a lender has deemed a debt uncollectible and written it off, which can significantly lower your credit score and raise concerns for mortgage lenders.
What credit score is needed to buy a house?
For most conventional mortgages, you need a credit score of at least 620, but this varies from lender to lender. It’s possible to qualify for an FHA loan, which is backed by the federal government, with a credit score as low as 500.
How long after paying off collections can you buy a house?
Quick Answer. Even after you pay a collection account, it stays on your credit report for seven years.
Do charge-offs go away after 7 years?
Yes, charge-offs typically disappear from your credit report after 7 years. The seven years begin on the date of the first late payment that led to the charge-off, not the date the account was officially charged off.