3 Things USDA's Collection Account Rule Comes Down To
3 things. That's all USDA's collection account rule comes down to, and most people get the first one wrong before they ever talk to a lender. I am Jason Sharon, and I want to walk you through them using Ariana, an illustrative buyer whose situation comes up often.
Meet Ariana
Ariana lives near Newberry, South Carolina. She has a collection account on her credit report, and she is considering a USDA loan. Her plan sounds responsible: drain her savings, pay the collection account off in full, and then apply.
Ariana is a fictional example, not a real client. But a lot of buyers with collection accounts think exactly the way she does. They assume the lender wants the account paid, so they pay it, often with the same money they would need for the rest of the process.
What the USDA guideline says
The guidance sits in Exhibit 4-4, Paragraph 4.14.C. The passage starts by describing indicators of unacceptable credit: outstanding collection accounts with a record of irregular payments and no satisfactory arrangements for repayment, or collection accounts paid in full within the last 6 months, unless the applicant had been making regular payments previously.
Then it says this, word for word: "However, paying an outstanding account is not in itself justification for acceptable credit. The Loan Approval Official may determine it is not necessary to pay a collection account if there is evidence it does not affect the Agency's first lien position."
The 3 things
Here is what that comes down to.
First, paying is not proof of acceptable credit. This is the one most people get wrong. Writing a check to clear a collection account does not, by itself, settle the credit question for USDA. The same passage even lists collection accounts paid in full within the last 6 months as an indicator of unacceptable credit, unless the applicant had been making regular payments previously. So a lump-sum payoff is not a magic fix.
Second, the Loan Approval Official makes the determination. The guideline says the official "may determine" payment is not necessary. That is a judgment call made on the file, not a blanket rule, and not something I or anyone else can promise in advance.
Third, the test is the Agency's first lien position. The question is whether there is evidence the collection account does not affect it. That is the evidence your file needs to speak to.
What Ariana should do before she spends a dollar
For Ariana, the smart move is to ask before she pays. Here is the question I would have her ask:
"Under Exhibit 4-4, Paragraph 4.14.C, can the Loan Approval Official review whether this collection account affects the Agency's first lien position, and what evidence do you need from me to show that?"
Then she should request two things. First, her payment history or a written repayment arrangement, since the guideline speaks to irregular payments and satisfactory arrangements for repayment. Second, a written answer on whether the collection must be paid before closing.
Getting it in writing matters. It replaces guesswork and hallway advice with an actual answer tied to her file.
Why this protects your savings
Savings are what carry a buyer through the rest of the process. If Ariana empties them to pay an account that the Loan Approval Official might not have required her to pay, she has spent reserves for nothing. And if she pays it and the payoff itself raises a question, she may be in a worse spot than before.
I am not saying never pay a collection account. In some files, payment or a repayment arrangement is exactly what makes sense. I am saying decide with the guideline in front of you, not on instinct.
Your next step
If you have a collection account and a USDA loan in mind, do not empty your savings first. Gather your payment history or any written repayment arrangement, bring the question above, and ask for the answer in writing. Every file is different, and the decision belongs to the Loan Approval Official.
I am a licensed mortgage broker, and my job is to find the path. Call me at 843-LOW-RATE and we will look at where you stand.
Home Loans Inc - Jason Sharon, Mortgage Broker. Company NMLS #1728740, Jason Sharon NMLS #1281448. Equal Housing Opportunity.
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