Learn how traditional and FHA loans handle derogatory accounts

Derogatory accounts such as collections, charges, judgments, and unpaid taxes can greatly affect your ability to qualify for a loan when you get a mortgage. However, how these accounts are handled is very different, depending on whether you apply for a traditional loan (backed by Fannie Mae) or an FHA loan.

Below, we break down how traditional and FHA loans derogate from accounts, including what must be paid off before closing and what may be left open.

Collect accounts

FHA Loan:

• The collection account must be paid in full before closing or You can use 5% of the outstanding balance and include it in the Debt Income (DTI) ratio.
• No additional documentation is required.

Regular loans (Fennie Mae):

• Major single-family residences: Unlimited collection accounts may still not be paid.
• Main 2–4 unit features: If the total collection account exceeds $5,000, it must be paid off before closing.
• Investment Property: 250PercollectionAccountor250PercollectionAccountor1,000 cumulatives must be paid off before closing.

Tax payable by the IRS

FHA Loan:

• You must have a 3-month payment history, but you do not need to pay until you close it.

Regular loans (Fennie Mae):

• Payment must be made at least before closing.
• Appropriate IRS payment plan documents are required.

Non-mortgage fees

FHA Loan:

• Non-mortgage fees may still not be paid.

Regular loans (Fennie Mae):

• Major single-family residences: Unlimited charges may remain open.
• Major 2-4 units of property or investment properties: For the amounts that must be paid off, please refer to the above-mentioned Account Collection Guide.

judge

FHA Loan:

• You must have a 3-month payment history, but you do not need to pay until you close it.
• Appropriate documents regarding payment plan terms are required.

Regular loans (Fennie Mae):

• Judgment must be paid in full before closing.

Key Points

• FHA Loan More flexible by derogatory accounts, keeping some people free of charge or incorporating them into your DTI.
• Regular loans There are stricter requirements, especially for investment properties and multi-unit major residential properties.

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