Must a collection previously reported as a charge off be included in credit and capacity analysis?

If a previously reported Charge Off Account is subsequently reported as an open collection account, the debt must be considered for credit and capacity analysis in accordance with Collection Account guidance found in Handbook 4000.1 II.A.4.b.iii. Evaluating Credit History (TOTAL); 4000.1 II.A.4.b.iv. Evaluating Liabilities and Debts (TOTAL); 4000.1 II.A.5.a.iii. Evaluating Credit History (Manual); and 4000.1 II.A.5.a.iv. Evaluating Liabilities and Debts (Manual). 

If the credit reports used in the TOTAL Mortgage Scorecard analysis show cumulative outstanding collection account balances of $2,000 or greater, the Mortgagee must:
• verify that the debt is paid in full at the time of or prior to settlement using acceptable sources of funds;
• verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s debt-to-income (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 Borrower’s 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 Borrower’s ability to pay all collection accounts, unless excluded by state law. 

The Mortgagee 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. 
If the Mortgagee uses 5 percent of the outstanding balance, no documentation is required. 

Handbook 4000.1 is available at

All policy information contained in this knowledge base article is based upon the referenced HUD policy document. Any lending or insuring decisions should adhere to the specific information contained in that underlying policy document.

Topic Number: KA-01171