The Scoop on Derogatory Accounts: Conventional and FHA Loan Guidelines

Derogatory accounts. The phrase alone sounds so ominous. If you have derogatory accounts, you might feel like you’re not in a position to make real estate goals, let alone achieve them.

We’re here to tell you that derogatory accounts are not the end of the world. You deserve a chance at homeownership! If you want to apply for a mortgage but bring derogatory accounts to the mortgage desk, we have some info that you need to know.

Here’s the deal: Conventional and FHA loans both allow borrowers to have open derogatory accounts, but they differ on exactly what those accounts are.

If this knowledge gives you a little hope, this is your post! Read on to learn conventional and FHA loan guidelines regarding derogatory accounts, and find out what this means for your mortgage.

What Are Derogatory Accounts?

Derogatory accounts are seriously-delinquent accounts on your record. These unpaid bills are red flags to lenders. Here are a few examples of derogatory accounts:

• Collections
• Charge-offs
• Overdue taxes
• Judgments

Fannie Mae’s Stance on Derogatory Accounts

If you have derogatory accounts, you might be wondering about your chances of getting a conventional loan. Here are Fannie Mae’s guidelines regarding four different types of accounts:

• Collections:
  • If you plan to purchase a primary single-family residence, an unlimited amount of collection accounts may be unpaid at closing.
  • If you plan to purchase a primary residence with 2-4 units, you must pay collection accounts of more than $5,000 before closing.
  • If you are purchasing an investment property, you must pay $250 off per collection account or a total of $1,000 before closing.
• IRS taxes due: You must make at least one payment before closing with proof of an IRS payment plan.
• Non-mortgage charge-offs: An unlimited amount on these accounts may be open at closing for primary single-family home purchases.
• Judgments: You must pay these accounts in full before closing.

FHA’s Stance on Derogatory Accounts

When it comes to derogatory accounts, FHA loans operate a little differently. Here’s what you need to know:

• Collections: You must pay all collection accounts in full before closing. Alternatively, we can include 5% of the outstanding balance in your DTI.
• IRS taxes due: You must demonstrate three months of timely payment history. Prepaying three months of tax payments doesn’t count.
• Non-mortgage charge-offs: These accounts may remain unpaid at closing.
• Judgments: Like IRS taxes, you must have three months of non-delinquent payment history under your belt before closing.

Contact Us Today!

Don’t assume that your derogatory accounts will prevent you from reaching your homeownership goals! Contact MortgageDepot today to learn how derogatory account requirements differ between mortgage programs.

Connect with one of our loan consultants to learn more.