VA – Student Loan in Collection

Question:

How do we treat a student loan that is in collection?

Answer:

Student Loans in Collection that are Federal

If these are federal student loans, then I would expect an underwriter to require a documented payment arrangement on the debt unless the loans have been forgiven, discharged, or canceled by the federal agency in writing. The payment in the agreement will be used. (See guideline for Federal Debts below)

Student Loans in Collection that are not Federal

An underwriter will review the amount and age of these accounts. And while it is common to assess a payment of 5% of the balance IF there is no payment stated on the credit report, the underwriter must also consider the age of these accounts. If these are recent accounts, the underwriter has to take that into consideration and justify approving a loan at all if it has received a REFER recommendation. If a file has received an AUS approval, then the underwriter may allow no payment to be assessed if the accounts are older. Typically, underwriters will “borrow” from FHA methodologies, or lenders will develop their own in-house policies. VA reviews the loans to see that the underwriter addresses the collection accounts and justifies their approach in the final underwriting decision. But they don’t prescribe the exact methodology to use, which is frustrating. (See collection guideline below.)

Reference:

VA Lenders Handbook Chapter 4, 6-e Treatment of Federal Debts

A borrower(s) cannot be considered a satisfactory credit risk if he or she is presently delinquent or in default on any debt to the Federal Government until the delinquent account has been brought current or satisfactory arrangement have been made between the borrower and the Federal agency.

Example: A borrower has delinquent taxes and payments have not been made for several years. The establishment of a payment plan after the CAVIRS finding has been addressed may not be sufficient to show a satisfactory payment arrangement to repay the obligation.

A borrower(s) cannot be considered a satisfactory credit risk if he or she has a judgment lien against his or her property for a debt owed to the Government until the judgment is paid or otherwise satisfied.

VA Lenders Handbook, Chapter 4, 7-b

Collection Accounts

Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval. A credit report may show numerous satisfactory accounts and one or two unpaid medical (or other) collections. In such instances, while it would be preferable to have collections paid, it would not necessarily be a requirement for loan approval.

However, collection accounts must be considered part of the borrower’s overall credit history and unpaid collection accounts should be considered open, recent credit.

Borrowers with a history of collection accounts should have re-established satisfactory credit in order to be considered a satisfactory credit risk.

While VA does not require that collection accounts be paid-off prior to closing if the borrower’s overall credit is acceptable, an underwriter must address the existence of the collection account(s) with an explanation on VA Form 26- 6393, Loan Analysis, for excluding the negative credit history they represent.

If the collection account is listed on the credit report with a minimum payment, then the debt should be recognized at the minimum payment amount.

MortageGuidelines.com Resource:

MortgageGuidelines.com provides an All Agency Comparison Chart on Collections-Judgments & Charge Offs, which is located under “Guideline References” in the Category of “All Agency”.˜