We see that the path to homeownership in the Great Lakes State is as unique as our shores. It doesn’t matter if you’re buying a home in Metro Detroit, a cottage Up North, or an investment property in Grand Rapids, your financial journey is personal. And for many Michigan homebuyers, past financial struggles, such as collections or judgments, can feel like a roadblock.
When it comes to handling derogatory accounts, Conventional and FHA loans have vastly different rules. Understanding these differences is crucial to selecting the right Michigan mortgage for your specific situation.
Let’s break down how FHA and Conventional loans (specifically Fannie Mae guidelines) treat common derogatory accounts.
Collection Accounts: The Big Difference
This is often where the most significant divergence is observed.
- FHA for Michigan Homebuyers: You have two options. You can pay the collection off in full before closing. Alternatively, the lender can use 5% of the outstanding balance and include that amount in your monthly payment, which will be factored into your debt-to-income (DTI) ratio. No lengthy documentation is required; it’s a relatively straightforward calculation.
- Conventional (Fannie Mae) for Michigan Homebuyers: The rules here depend heavily on your property type:
- Primary Single-Family Home: An unlimited amount of collection accounts may remain UNPAID. This is a huge advantage for many borrowers.
- Primary 2–4-Unit Property: If your total collection accounts exceed $5,000, they MUST be paid off before closing.
- Michigan Investment Property: Any single collection account of $250 or more, or a cumulative total of $1,000 or more, must be paid off.
Unpaid IRS Tax Bills
Owing back taxes doesn’t automatically disqualify you, but you must be on a plan.
- FHA: You must have a documented IRS payment plan and show 3 months of payment history. It does not require that 3 payments have been made before closing, just a history of on-time payments.
- Conventional (Fannie Mae): You need to have made at least 1 payment under the IRS payment plan prior to closing, with all proper documentation in the file.
Non-Mortgage Charge-Offs
- FHA: These accounts may remain unpaid.
- Conventional (Fannie Mae): For a primary single-family home, an unlimited amount may remain open. For 2-4 unit primary homes or Michigan investment properties, the rules are the same as for Collection Accounts (see above).
Judgments
This is another major differentiator.
- FHA: Similar to IRS debt, you need a documented payment plan and must show 3 months of payment history.
- Conventional (Fannie Mae): The judgment must be paid in full prior to closing. There is no option to simply have a payment plan.
Qualifying for Your Michigan Mortgage
As you can see, the best loan program for you depends entirely on your specific financial profile and the property you’re buying.
- Have several unpaid collections and buying a single-family home? A Conventional loan might be your best bet, allowing them to remain unpaid.
- Have an open judgment? An FHA loan is likely your only option, as it allows for a payment plan.
- Buying a Michigan investment property with small collections? A Conventional loan may require you to pay them off, while an FHA loan (if applicable) would not.
We specialize in Michigan lending guidelines, and some guidelines are not fully understood, which can make it challenging to make the proper decision for a home mortgage. We can help.
