FHA Rules for Collections and Judgments
Short answer
FHA usually doesn't make you pay off collections to get approved.
Medical collections and charged-off accounts are left out entirely.
Court judgments are different. Those have to be paid or on a payment plan.
| Medical collections | Left out |
|---|---|
| Charged-off accounts | Left out |
| Other collections under $2,000 total | Generally left alone |
| Other collections of $2,000 or more | Pay off, payment plan counted in your debt ratio, or 5% of the balance counted monthly |
| Court judgments | Paid off, or a payment plan with 3 on-time payments made |
If your non-medical collections add up to $2,000 or more, the lender takes one of three routes: you pay them off, you set up a payment plan and that payment counts in your debt ratio, or 5 percent of the balance is counted as a monthly payment. Under $2,000 they're generally left alone. A judgment needs to be paid off, or you need a written payment agreement with at least three months of on-time payments already made.
Most people with old collections assume they have to clear them first and wait. Call us and read us what's on your report. It takes about ten minutes, and you'll know the same day whether anything has to be paid.
Do you really have to pay off that old medical bill or collection account to buy a house? Usually, the answer is no. Here are the exact HUD 4000.1 rules for collections, judgments, and tax liens.
Do I have to pay these off?
What about medical bills?
Completely ignored. FHA doesn't require medical collections to be paid off, nor are they calculated in your debt ratio.
Is there a dollar threshold?
If your non-medical collections total $2,000 or more, the lender counts a monthly payment for them, usually 5% of the balance, but you don't have to pay them off.
What about judgments?
Unpaid judgments must be paid off OR you can establish a payment plan and make 3 consecutive on-time payments to qualify.
What about a tax lien?
Similar to judgments, tax liens don't automatically disqualify you if you have an established IRS payment plan with 3 months of history.
When do collections actually matter?
One of the biggest misconceptions in real estate is that you must have a perfectly clean credit report with zero collections to buy a house. FHA doesn't require collection accounts to be paid off as a condition of mortgage approval. However, they do calculate the outstanding debt against your income.
Why are medical bills treated differently?
The HUD 4000.1 handbook explicitly separates collections into two categories:
- Medical Collections: These are entirely excluded. They don't count toward your cumulative balance limit, and we don't calculate any monthly payment against your Debt-to-Income (DTI) ratio.
- Non-Medical Collections: These include unpaid credit cards, cell phone bills, auto repossession deficiencies, etc. These are subject to the cumulative balance rule.
What happens once they add up past 2,000 dollars?
If your total outstanding balances for all non-medical collections are equal to or greater than $2,000, the FHA requires the lender to account for this debt. We must apply one of the following methods:
- The 5% Calculation: We calculate 5% of the total outstanding balance and hit your Debt-to-Income ratio with that amount as a "monthly payment." (Example: If you have $3,000 in collections, we add $150/month to your debt profile).
- Payment Arrangement: If you have formally entered into a payment arrangement with the creditor, we use the actual documented monthly payment amount.
- Pay at Closing: If the 5% calculation pushes your DTI too high, you have the option to pay off the collections at (or before) closing.
Do I have to pay a judgment before closing?
Judgments and Federal Tax Liens are significantly more serious than standard collections because they can attach to the title of the new property you're buying. By default, FHA requires all judgments and liens to be resolved or paid in full prior to closing. However, there is a massive exception.
Can a payment plan get me through?
If you can't afford to pay off a large judgment or tax lien in full, you can still secure an FHA loan by establishing a formal, written payment agreement with the creditor or the IRS. To be eligible to close, you must meet the following criteria:
- You must provide a copy of the fully executed payment agreement.
- You must prove that you have made at least three consecutive, scheduled monthly payments on time.
- The agreed-upon monthly payment will be included in your DTI calculation.
Warning: You can't cheat the system by prepaying the three months all at once. FHA explicitly states: "The Borrower may not prepay scheduled payments in order to meet the required minimum of three months of payments." They must be verified as three distinct, monthly payments.
Collections and judgments at a glance
Have old collections on your report?
Collections don't always have to be paid before closing. Tell us what's on your report and we'll tell you which ones actually matter.
The call takes about ten minutes, with no application and no credit pull to get started.
Get Pre-Approved with Our Flexible FHA Program TodayAAA Capital Funding, Inc. NMLS #374739
Collections on your report don't automatically end an FHA purchase. If you want to buy, this is the kind of file we work every week as your independent Fort Lauderdale FHA mortgage broker.
The guideline is only the starting point.
Guidelines are written for the typical borrower. What gets approved depends on how the loan is structured and presented to the underwriter, and that takes experience. We've been structuring Florida loans since 1997, including plenty that other lenders couldn't get through.
Call 888-601-8344 and we'll go over your real numbers with you. Under ten minutes, straight answers, 24/7. No application, no credit pull.
Text 954-816-8820 if that's easier.
AAA Capital Funding, Inc. · NMLS #374739 · Jason J. Sarji, NMLS #374700