How do collections and charge offs on the credit report affect a Kentucky VA Mortgage Loan Approval?

Kentucky VA Loan Guidelines: Collections, Charge-Offs, Judgments and Liens

Many Kentucky veterans are worried that old collections or charge-offs will automatically stop a VA home loan approval. In most cases, that is not true. The VA underwriter looks at the whole credit picture, not just one negative item, and wants to know whether you are a satisfactory long-term credit risk.

This guide explains how Kentucky VA lenders typically treat collection accounts, charge-offs, judgments and liens when you apply for a VA mortgage.

VA credit guidelines can be flexible, but every file is different. The best way to know where you stand is to have your full credit report reviewed by a VA-approved lender who understands Kentucky guidelines.

How VA Views Collection Accounts

VA does not automatically require every collection to be paid before you can close on a home. Instead, the underwriter reviews the type, age, size and pattern of the collection accounts and whether you have re-established good credit since those events.

Key points about collection accounts

• Isolated or low-impact collections (especially older medical collections) generally do not have to be paid as a condition of approval.
• All collections are still treated as part of your overall credit history, even if payment is not required.
• If the credit report shows a minimum monthly payment on a collection, that payment may need to be counted in your debt-to-income ratio (DTI).
• Borrowers with prior collections are expected to show re-established, on-time credit afterward.
• The underwriter documents the handling of collections on VA Form 26-6393, Loan Analysis, to explain why the negative history does not make the loan unacceptable.

When a Letter of Explanation is needed for collections

For many Kentucky VA loans, especially manual underwrites, the lender will ask for a short written Letter of Explanation (LOE) that covers:

• What happened that led to the collection
• What you did to resolve or address it
• What you are doing now to avoid the same situation in the future
• Whether you plan to pay it, settle it or leave it as is

The goal is to show that the collection is tied to a specific, understandable event and that your current behavior reflects responsible money management.

How VA Views Charge-Off Accounts

Charge-offs are accounts the creditor has written off and is no longer actively trying to collect. VA generally treats them differently than active collections.

Key points about charge-offs

• Charge-offs usually are not required to be paid for a VA loan approval.
• They are often ignored for DTI purposes since there is no active minimum monthly payment.
• The underwriter still looks at the circumstances and timing of the charge-offs to decide whether you have since re-established good credit.

Even when a charge-off does not need to be paid, it still contributes to the overall picture of how you have used credit in the past.

Debts That Must Be Paid Before a Kentucky VA Closing

Some items cannot simply be left unpaid because they affect title and the legal ability to record the new mortgage. These almost always must be paid or released prior to closing.

Judgments

• Civil judgments reported on credit or discovered in public records generally must be paid in full or have a documented, satisfactory repayment agreement in place.
• Judgments can attach to the property and impact title, so they must be resolved before recording the VA mortgage.

Liens

• Tax liens, child support liens and other recorded liens must be paid, released or otherwise cleared before closing.
• Federal debt issues are treated very seriously. Delinquent federal debt will usually stop a VA loan until it is resolved.

When VA Credit Issues Lead to Manual Underwriting

Not every VA file receives an Approve/Eligible recommendation through automated underwriting. When there are multiple collections, recent late payments or other risk factors, your loan may be manually underwritten.

On a manual underwrite, the underwriter will focus heavily on:

• Pattern of on-time payments over the last 12–24 months
• Stability of income and employment
• Overall DTI ratio and residual income
• Strength of the LOE around prior collections or charge-offs

Good, recent payment history can often outweigh older negative items if the rest of the file is strong.

Key Takeaways for Kentucky VA Homebuyers

• Most standard collections do not automatically have to be paid to qualify for a VA loan.
• Charge-offs are often ignored for DTI, but still reviewed as part of credit history.
• Judgments, tax liens and many federal debts must be cleared or resolved before closing.
• A clear, honest Letter of Explanation helps the underwriter understand what happened and why your situation is now stable.
• The best approach is a full credit review by a Kentucky VA lender who knows how to work within VA guidelines.

Request a Kentucky VA credit review

If you have collections or charge-offs and you are not sure how they will affect your VA home loan, I can review your credit report and give you a clear plan. Many veterans are closer to qualifying than they think once the file is structured correctly.

Joel Lobb (NMLS #57916)
Senior Loan Officer
Cell/Text: 502-905-3708
Email: kentuckyloan@gmail.com
Website: www.mylouisvillekentuckymortgage.com

More Kentucky VA Loan Resources

• Kentucky VA loan requirements and updates
• All VA loan articles for Kentucky veterans
• Start a Kentucky VA loan application

This website is not affiliated with any government agency, including the U.S. Department of Veterans Affairs (VA).
NMLS ID #57916 (www.nmlsconsumeraccess.org)

FHA Mortgage Manual Underwriting Video Guidelines

Did you know over 50% of our Kentucky  FHA loans are manual underwrites?

 

Kentucky FHA will consider the borrower’s entire story, including extenuating circumstances and compensating factors, to justify loan approvals. If your borrower falls under any of these conditions, they may benefit from manual underwriting:

• Non-traditional credit / lack of credit
• True extenuating circumstances affecting credit or income history
• Lack of seasoning on a Chapter 13
• Disputed accounts over $1,000
• Frequent job changes in the last 12 months

If you think your borrower could benefit from  manual underwriting call us to learn more about manual underwriting or submit your scenario today.

Lowest Minimum Decision Credit Score 

Maximum Qualifying Ratios (%)

 Acceptable Compensating Factors

All manual underwritten loans require a VOR.

If the borrower does not pay rent a letter of explanation from borrower stating where living rent free.

31/43
• No compensating factors required.
• Energy Efficient Homes may have stretch ratios of 33/45.

37/47
One of the following:
• Verified & documented cash reserves equal to at least three total monthly mortgage payments.
• New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is a documented twelve-month housing payment history with no more than one thirty-day late payment.
• Residual Income per VA chart.

40/40
• Borrower has established credit lines in his/her own name (open for at least six months) but carries no discretionary debt (monthly total housing payment is only open installment account and borrower can document that revolving credit has been paid off in full monthly for at least the past six months).

40/50
Two of the following:
• Verified & documented cash reserves equal to at least three total monthly mortgage payments.
• New total monthly mortgage payment is not more than $100 or 5% higher than previous total monthly housing payment, whichever is less; and there is a documented twelve-month housing payment history with no more than one thirty-day late payment.
• Verified and documented significant additional income that is not considered effective income and likely to continue (part-time or seasonal income verified for more than 1 year but less than 2 years). The income if it were included in gross effective income is sufficient to reduce the qualifying ratios to not more than 37/47.
• Residual Income per VA chart.

Residual Income

Calculating Residual Income

Residual income is calculated in accordance with the following:
• Calculate the total gross monthly income of all occupying borrowers
• Deduct from the gross monthly income the following items:
➢ State income taxes
➢ Federal income taxes
➢ Municipal or other income taxes
➢ Retirement or Social Security
➢ Proposed total monthly fixed mortgage payment
➢ All recurring monthly debt obligations
➢ Estimated maintenance and utilities ($0.14 x sq. ft.)
➢ Job related expenses (e.g., child care)

• The difference between the gross monthly income and the deductions above is the residual income

Compensating Factors

Using Residual Income as a Compensating Factor
Count all members of the household of the occupying borrowers without regard to the nature of their relationship and without regard to whether they are joining on title or the note.
Exception: As stated in the VA Guidelines, the mortgagee may omit any individuals from “family size” who are fully supported from a source of verified income which is not included in the effective income in the loan analysis. These Individuals must voluntarily provide sufficient documentation to verify their income to qualify for this exemption.

From the table below, select the applicable loan amount and household size. If residual income equals or exceeds the corresponding amount on the table, it may be cited as a compensating factor.

Accept Risk Class required downgrade to Manual Underwriting

The Mortgagee must downgrade and manually underwrite any mortgage that received an accept or approve/eligible recommendation if:
• The mortgage file contains information or documentation that cannot be evaluated by TOTAL.
• Additional information, not considered in the AUS recommendation affects the overall insurability of the mortgage.
• The borrower has $1,000 or more collectively in Disputed Derogatory Credit Accounts.
• The date of the borrower’s bankruptcy discharge as reflected on bankruptcy documents is within two years from the date of the case number assignment.
• The case number assignment date is within three years of the date of the transfer of title through a Pre-Foreclosure Sale (Short Sale).
• The case number assignment date is within three years of the date of the transfer of title through a foreclosure sale.
• The case number assignment date is within three years of the date of the transfer of title through a Deed-in-Lieu (DIL) of foreclosure.
• The Mortgage Payment history, for any mortgage trade line reported on the credit report used to score the application, requires a downgrade as defined in Housing Obligations/Mortgage Payment History.
• The Borrower has undisclosed mortgage debt that requires a downgrade.
• Business income shows a greater than 20 percent decline over the analysis period.

https://www.hud.gov/sites/documents/fy16_sfhb_mod4_under.pdf

Kentucky FHA Loans with Bad Credit in 2023.

How to get approved for a Kentucky FHA Mortgage Loan with Bad Credit in 2023.

Below details the DTI requirements The maximum Front and Back ratios applicable to manually underwritten Kentucky FHA Mortgages are detailed below. 

Maximum DTI allowed for Manual UW is 40/50 

**IMPORTANT – any loan where ALL borrowers have No Fico Score, the Maximum DTI is 31/43 per HUD DTI and Compensating Factor Requirements: 

560 FICO and Above – DTI up to 31/43.Comp Factors Required - NONE. 

560 FICO and Above - DTI up to 37/47Comp Factors Required– 1 Required 

560 FICO and Above – DTI up to 40/50Comp Factors Required– 2 Required

ACCEPTABLE COMPENSATING FACTORS:

RESERVES – 3 mo (1-2 Unit) 6 Mo (3-4 Unit)

HOUSING DECREASE – new PITI is no more than $100 or 5%, the lesser of the two

RESIDUAL – Meet VA residual requirements

ADDITIONAL INCOME – Income not reflected in DTI (this comp factor is only permitted when DTI is over 37/47 and if income were used, it would decrease DTI under 37/47)

MANUAL UNDERWRITE REQUIREMENTS ON ALL LOANS

12 Months verified housing history OR rent free letter,

Reserves, AND

1 month reserves for 1-2 Unit

3 month reserves for 3-4 Unit

NOTE: If you use reserves as a compensating factor, then you do not need these reserves in addition

Letter of explanation for all derogatory credit, including any NSFs and/or overdrafts in bank accountIf applicable, 2 months for all bank statements in the file (60 days activity)

Maximum DTI 40/50 (HUD guideline, no exceptions

Instructions for Residual Income as Compensating Factor

Residual income may be used as compensating factor when it meets or exceeds the stated amounts in

the table below. Note that all household members must be counted for ‘family size’ except for individuals

who are fully supported from a verified source of income not included in the effective income of the loan.

Residual Income Calculation When Needed as a Compensating Factor

Gross Monthly Income1 2

- (State income taxes3)

- (Federal income taxes3)

- (Municipal or other taxes3)

- (Retirement deductions and/or Social Security deductions)

- (Total monthly housing payment)

- (Estimated maintenance and utilities4)

- (Job related expenses (e.g., childcare)5)

= Monthly Residual Income for Family Support.

[When using Residual Income as a compensating factor, the “Monthly Residual Income for Family Support” must

meet or exceed the dollar amount in the “Residual Income Table” above.

1 Income from occupying borrowers only

2 Non-taxable income may not be grossed up

3 Federal and state taxes must be used to determine appropriate deductions or paystub if taxes are not available

4 Multiply total living area (sq ft) x 14

5 Childcare letter is not required (as it is for VA) and should not be requested

Exceptions to the Required Residual Income

You may reduce the residual income figure from the above tables by 5% if:

1. The borrower(s) is an active duty or retired serviceperson, OR

2. There is a clear indication that a borrower will receive the benefits resulting from use of military-based

facilities located near the property.

Examples of military service for reduced residual income are:

Guard and Reserve military retirees, 100% disabled Veterans and their family members, or Medal of Honor

recipient.

Joel Lobb
Mortgage Loan Officer
Individual NMLS ID #57916


American Mortgage Solutions, Inc.
10602 Timberwood Circle
Louisville, KY 40223
Company NMLS ID #1364



Text/call: 502-905-3708
fax: 502-327-9119
email: kentuckyloan@gmail.com

http://www.mylouisvillekentuckymortgage.com/

The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people.
NMLS ID# 57916, (www.nmlsconsumeraccess.org).

How does consumer credit counseling effects things on a Kentucky FHA or USDA loan in Kentucky ?

 KENTUCKY FHA GUIDELINES FOR CONSUEMR CREDIT COUNSELING

(J) Credit Counseling/Payment Plan (APPROVE/ELIGIBLE)Participating in a consumer credit counseling program does not require a downgrade to a manual underwriting.No explanation or other documentation is needed.

 

(K) Credit Counseling/Payment Plan (MANUAL UW) Participating in a consumer credit counseling program does not disqualify a Borrower from obtaining an FHA-insured Mortgage, provided the Mortgagee documents that:

• one year of the payout period has elapsed under the plan;
• the Borrower’s payment performance has been satisfactory and all required payments have been made on time; and
• the Borrower has received written permission from the counseling agency to enter into the mortgage transaction.

 

 

KENTUCKY RURAL HOUSING USDA GUIDELINES FOR CONSUMER CREDIT COUNSELING 

CONSUMER CREDIT COUNSELING - DEBT MANAGEMENT PLANS

Credit counseling provides guidance and support to consumers which may include assistance to negotiate with creditors on behalf of the borrower to reduce interest rates, late fees, and agree upon a repayment plan. The credit score will reflect the degradation of credit due to participation in this plan. Credit accounts that are included in the repayment plan may continue to report as delinquent or as late pays. This is typical and will not be considered as recent adverse credit. Lenders must retain documentation to support the accounts included in the debt management plan and the applicable monthly payment. Lenders must include the monthly payment amount due for the counseling plan in the monthly liabilities. GUS Accept/Accept with Full Documentation files: No credit exception is required. GUS Refer, Refer with Caution, and manually underwritten files: The following must be documented and retained in the lender’s permanent loan file: •One year of the payment period of the debt management plan has elapsed; •All payments have been made on time; and •Written permission from the counseling agency to recommend the applicant as acandidate for a new mortgage loan debt. •No credit exception is required

--

Joel Lobb
Mortgage Loan Officer

Individual NMLS ID #57916

American Mortgage Solutions, Inc.

10602 Timberwood Circle 

Louisville, KY 40223

Company NMLS ID #1364

click here for directions to our office

Text/call:      502-905-3708

fax:            502-327-9119
email:          kentuckyloan@gmail.com

https://www.mylouisvillekentuckymortgage.com/