Buying a home can be both exciting and overwhelming, especially if you have charge-offs or collection accounts on your credit report. You may wonder: “Will these past financial missteps stop me from qualifying for an FHA loan?” The answer isn’t a simple yes or no—it depends on several factors, including your overall credit profile, the type of debt, and how lenders evaluate risk.
If you’re considering an FHA loan but have past collections or charge-offs, this guide will break down everything you need to know, including how these debts impact your approval, ways to improve your chances, and strategies for handling outstanding accounts.
What Are Charge-Offs and Collections Does FHA Allow?
Before diving into FHA loan guidelines, let’s clarify these two types of negative credit events:
- Charge-Offs: A charge-off occurs when a creditor writes off an unpaid debt as a loss because the borrower failed to make payments for an extended period (usually 180 days). While the lender stops trying to collect, the debt remains on your credit report and negatively impacts your score.
- Collections: If a creditor sells or assigns your unpaid debt to a collection agency, it becomes a collection account. Collection agencies aggressively pursue payment, and these accounts can significantly hurt your credit score.
Aren’t Old Debts Just Forgotten?
Some borrowers assume “If a debt is old, lenders won’t care.” However, FHA guidelines require lenders to review outstanding debts—even those that have been charged off or placed in collections.
How Does the FHA View Charge-Offs and Collections?
1. Charge-Offs and FHA Loan Approval
Surprisingly, FHA loans do not require borrowers to pay off charge-off accounts to qualify for a mortgage. However, there are exceptions:
- If a charge-off is tied to a government debt (like taxes or student loans), you may need to resolve it before loan approval.
- Charge-offs related to mortgage debt (such as a foreclosure) may require additional scrutiny.
While FHA lenders don’t always require charge-offs to be paid, they still factor into your credit score and financial profile.
2. Collection Accounts and FHA Loan Approval
FHA guidelines treat collection accounts differently depending on their total balance:
- If your total unpaid collections exceed $2,000, FHA lenders must factor them into your debt-to-income (DTI) ratio by assuming a monthly payment of 5% of the outstanding balance.
- If your total collection balance is under $2,000, they are not counted against your DTI, though they may still lower your credit score.
- Medical collections are generally not considered in FHA underwriting, as they are viewed as unavoidable and less indicative of financial mismanagement.
Does This Mean I Have to Pay Off My Collections?
Not necessarily. FHA guidelines do not require you to pay off collection accounts before approval—unless the lender considers them a risk. However, if your lender requires payment, settling collections could improve your credit score and loan terms.
Your Credit is a Financial Report Card
Think of your credit history as a report card from your financial past. Just like a student’s grades reflect their academic performance, your credit score shows lenders how responsible you are with money. Even if you had bad grades in the past (charge-offs or collections), there’s always room for improvement before applying for an FHA loan.
What If I Have a Low Credit Score?
You might ask, “What if my credit score is too low for an FHA loan?” The good news is that FHA loans accept lower credit scores than conventional loans.
- You can qualify with a score as low as 580 with a 3.5% down payment.
- If your score is between 500-579, you may still qualify, but you’ll need a 10% down payment.
- Scores below 500 are usually ineligible, but credit counseling or dispute resolution may help improve your score.
If your charge-offs or collections have dragged down your credit, you can still qualify by showing recent financial responsibility, stable income, and manageable debt.
Is It Really Worth Paying Off Old Debts?
Imagine you’re preparing for a mortgage application, and you have a few old collections. You may wonder, “Should I even bother paying these off?” The answer depends on your financial situation:
- Paying off a collection won’t remove it from your credit report (it stays for 7 years).
- However, settling or negotiating debts may boost your credit score and make lenders more comfortable approving your FHA loan.
- In some cases, lenders may require proof of resolved debts before closing.
The decision ultimately depends on your loan officer’s recommendations and your financial goals.
How to Improve Your FHA Loan Chances with Charge-Offs or Collections
If you have unpaid charge-offs or collections, here’s how to improve your approval odds:
1. Check Your Credit Report
Start by reviewing your credit reports from Experian, Equifax, and TransUnion. Look for errors, outdated accounts, or debts that should no longer be reported.
2. Work on Your Debt-to-Income Ratio (DTI)
Lenders evaluate your DTI to determine how much of your income is spent on debt payments. If you have high debt balances, consider:
✅ Paying off smaller debts to reduce your DTI.
✅ Negotiating settlements on larger collections.
✅ Increasing your income with a side job to improve your ratio.
3. Consider FHA-Friendly Lenders
Not all lenders interpret FHA guidelines the same way. Some may be stricter with collections, while others are more flexible. Shopping around for FHA-approved lenders can improve your chances of finding a loan that fits your situation.
4. Get Pre-Approved Before Shopping for a Home
Pre-approval helps you understand your loan options before you start house hunting. A lender will evaluate your credit, income, and debts to determine how much home you can afford.
Can You Get an FHA Loan with Charge-Offs or Collections?
Yes—but it depends on the specifics of your debt. FHA loans do not automatically disqualify borrowers with charge-offs or collections, but lenders still consider them when reviewing your creditworthiness.
Key Takeaways:
✅ Charge-offs generally do not need to be paid off.
✅ Collections over $2,000 may affect your DTI ratio.
✅ Medical collections are often disregarded.
✅ Your credit score and payment history matter most.
✅ FHA-friendly lenders may offer more flexibility.
If you’re serious about buying a home with an FHA loan but have past financial challenges, work on improving your credit, managing debt, and finding the right lender to help you navigate the process.
Wouldn’t it be amazing if your past financial struggles didn’t define your future homeownership? With the right planning, patience, and persistence, an FHA loan could still be within reach!
References:
Consumer Financial Protection Bureau. (n.d.). Understanding charge-offs and collections. Retrieved from https://www.consumerfinance.gov/
Federal Housing Administration. (2025). FHA single-family housing policy handbook. U.S. Department of Housing and Urban Development. Retrieved from https://www.hud.gov