How Underwriters View Collections on Mortgage Loans

This article will cover how underwriters view collections and charge-off accounts when reviewing a borrower for a mortgage loan. Homebuyers can qualify for an FHA loan with outstanding collections and charged-off accounts. How underwriters view collections and charge-off accounts depends the lender the mortgage underwriter works for.

If the lender has no overlays on collection accounts, underwriters are instructed to follow HUD agency guidelines but use underwriter discretion.

How underwriters view collections and charged-off accounts normally is they do not require it to be paid.However, with non-medical collections, underwriters will require 5% of the outstanding balance to be used as a hypothetical debt for debt-to-income ratio calculations. In the following paragraphs, we will cover more on how underwriters view collections and charge-off accounts during the mortgage approval process.

How Do Underwriters View Collections When Underwriting FHA Loans

FHA loans are the best mortgage loan program for borrowers with bad credit and low credit scores. The algorithm for HUD on the automated underwriting system with regards to bad credit is the most lenient than any other mortgage loan program. You can qualify for an FHA loan with credit scores down to 500 FICO. The maximum credit score on FHA loans for an AUS approval is 46.9/56.9 debt-to-income ratios.

Borrowers can qualify for FHA Loans with outstanding collection accounts. HUD, the parent of FHA, does not require you to pay off the outstanding unpaid collection account balances in order to qualify for FHA loans.

HUD, the parent of FHA, will count a percentage of any outstanding non-medical collection account balances. HUD requires mortgage underwriters to use 5% of the outstanding non-medical collection balance towards calculating borrower monthly debt to income ratios. This is only for non-medical collections. and medical collections are exempt.

How Underwriters View Collections on Mortgage Loans

Learn how underwriters view collections on mortgage loans in 2025. Understand FHA, VA, USDA, and Conventional guidelines and your options for mortgage approval.

Collections on Your Report—What Underwriters Really See

When you see the word “collections” on your credit report, it can feel like a red flag. However, underwriters look at it from several angles rather than rejecting your file. They want to know how the collection happened, how long it’s been on your report, and how you manage credit now.

Different mortgage programs have different rules, and that matters. FHA guidelines allow certain small collections. At the same time, VA loans focus more on your debt-to-income ratio than on one angry account.

USDA guidelines are like FHA’s friend, often showing similar flexibilities. Being more credit-score-minded, conventional loans care about how the collection impacts your overall credit score and age relative to your other accounts.

HUD, VA, USDA, and the Flexibility Font

FHA loan officers don’t bat an eye at collections under a certain dollar amount, and they might overlook one venting from a couple of years ago—as long as you’ve managed new accounts responsibly since that time.

VA underwriters, prized for being more forgiving, want to see the worst collection on your report vanish for at least 12 months. Otherwise, the file would need a solid debt-to-income ratio to balance the view.

USDA works the same map, quietly and quickly forgiving collections that don’t affect your ratio.Conventional guidelines are less compassionate. They still consider the age of the collections and the credit-scoring blends that FICO calculates. Yet it is important to know that a fresh collection can bump an otherwise smooth file into the stalling lane of “conditional.”

Building Your Strategy for Mortgage Success

Remove any collection you can contest. Did a hospital charge that you never owed? Send an accurate dispute letter and track the bureau’s time frame, whether the collector stays silent or retracts it.

If the collection is untrue and the dispute fails, pay the debt—such action can often soften a lender’s view. Yet pay carefully. If the collector reports it as “settled” rather than “paid,” you give the lender a gifted new entry on an otherwise clean report.

Exchange unspent collection entries for “paid or resolved” notes and quietly juice your debt-to-income ratio by 2-3% before applying. That calculator plays up in FHA’s and USDA’s rationale, while VA and Conventional still appreciate the lesser load score impact.  Enjoy the loan in progress! At Gustan Cho Associates, we handle the mortgage homework so you can focus on your move.

How Underwriters View Collections in General

When lenders review your loan application, their main job is to spot risk. Collections show debts sent to collections reported to credit agencies. Even old debts matter. Underwriters look at these details:

Type of Collection (Medical vs. Non-Medical Collections)

• Total balance.
• Date of last payment or activity.
• Effect on your debt-to-income (DTI) ratios.
• Your whole credit history and payment habits.

Medical vs. Non-Medical Collections

• Medical collections usually get easier rules.
• Many lenders and credit agencies leave them out of DTI calculations.
• Non-medical collection: Think credit cards, utility bills, or repossessions—often get a closer look.

Charged-Off Accounts vs. Collections

Charged-off accounts show that a debt is closed on the original creditor’s books, but collections might still try to collect. Both appear on credit reports. Charged-off debts, especially if dated, usually worry underwriters less unless there are many or very recent.

How FHA Underwriters View Collections

The Federal Housing Administration (FHA) allows more flexibility than conventional loans, but it still has guidelines that you should understand.

FHA Rules on Collections

• Medical collections: FHA rules state that these debts do not hurt your ability to qualify.
• Underwriters do not need them paid off to move your application forward.
• Non-medical collections over $2,000: FHA tells underwriters to add 5% of the total balance as another “monthly payment” when working out your debt-to-income (DTI) ratio.
• Collections under $2,000: Left out of the DTI calculation.

Example: If you owe $10,000 in unpaid non-medical collections, FHA will treat it as $500 a month in DTI, even if you’re not making any payment.

What Conventional Underwriters Do with Collections

Conventional loans, which are underwritten by Fannie Mae and Freddie Mac, are tougher than FHA.

Conventional Guidelines

• Collections and charge-offs don’t always have to be paid to get approved.
• In cases where the collections are large or recent, underwriters may ask for an explanation or want you to repay some of it.
• Some lenders add “overlays,” which are stricter rules.
• They may turn down an application if you have big collections, even when Fannie Mae says it’s okay.

This makes it important to choose a lender with no overlays—like Gustan Cho Associates—so that you don’t miss out because of unwritten rules.

How VA Underwriters Handle Collections

VA loans are for veterans, active-duty members, and certain surviving spouses. They are the easiest loan category for collections.

VA Guidelines

• VA does not set a hard dollar limit on collections.
• USDA and FHA underwriters look for compensating factors like steady income, leftover cash, and positive current bills.
• Big unpaid bills can still spark questions, and underwriters might want to see them cleared if they doubt repayment ability.

USDA Collections and Underwriting

USDA loans let borrowers catch a break on collections, just as FHA does, but there are rules.

• Medical bills typically don’t count.
• Other collections might need to be added to the debt calculation.
• USDA underwriters want to see if the monthly bills are still manageable.

Must You Clear Collections Before a Mortgage?

We hear this question often, and the simple reply is no, not always.

When Collections Must Go

• If an underwriter thinks the debt makes repayment tough.
• If the collection is a government account, like defaulted student loans, unpaid taxes, or child support.
• If the lender sets a stricter rule than the agency.

At Gustan Cho Associates, we don’t add extra policies. We follow the advice of government agencies.

Manual Underwriting and Collections

Sometimes, your loan ends up underwritten manually—especially with FHA and VA loans—so your history gets extra scrutiny.

• You don’t have to pay off old collections immediately, but you need to prove you’ve made on-time payments for the last 12 months on your other debts.
• If you have enough savings, a low debt-to-income ratio, or a solid rental history, those facts can help the lender feel more comfortable.

What to Do If You Have Collections

Want to strengthen your mortgage approval chances when you have collections?

Here’s a simple game plan:

• Avoid disputing collection accounts when you’re in the loan process.
• Only dispute if you find an error: Otherwise, an open dispute can freeze your application until the creditor responds.
• Prepare a quick letter of explanation: Tell the lender what led to the collection and share what’s changed to ensure you won’t repeat it.
• Highlight your recent payment track record: Underwriters pay more attention to the last 12–24 months, so show them steady, responsible credit use.
• Find a lender with no overlays: Some lenders add extra rules that slice deeper than FHA, VA, or Fannie Mae guidelines, so a lender with no overlays may offer a smoother path.—

Collections Are Not the End of the Road

Seeing collections on your credit report doesn’t close the door on buying a home. Underwriters look at collections based on the loan type, the total owed, and your bigger financial picture. With Youstill get to the closing table.

At with the right lender and solid advice Gustan Cho Associates, we close loans daily for clients turned away everywhere else. Our team knows FHA, VA, USDA, Conventional, Jumbo, and Non-QM loans inside out with no lender overlays.

Hit us at 800-900-8569 or click APPLY NOW to launch your mortgage journey.

FAQs About How Underwriters View Collections

Do Underwriters Require All Collections To Be Paid Off Before Approving a Mortgage?

• No.
• In most situations, collections must be satisfied only if the debt is tied to a government agency.

How Do FHA Underwriters View Medical Collections?

• Medical collections are ignored.
• They don’t impact your debt-to-income ratio.

What happens if I Have Over $2,000 in Non-Medical Collections on FHA Loans?

• The underwriter must count 5% of the total collection balance as a phantom monthly payment in your DTI.

Can I Get a Conventional Loan With Collections?

• Yep!
• If the automated underwriting system says go ahead, you’re in.
• Just keep in mind that some lenders may have extra rules.

Will VA Loans Allow Collections?

• Definitely.
• VA loans have relaxed rules, and the lenders focus more on what you’ll have leftover each month.

Can USDA Loans Be Approved With Collections?

• Yes, but unpaid collections, especially for non-medical bills, might still hurt how much home you qualify for.

Should I Pay Off Collections Before Applying For a Mortgage?

• Not always!
• Paying off some collections can actually drop your score.
• Ask your loan officer before doing it.

What if My Loan Goes to Manual Underwriting With Collections?

• You’ll need a solid, recent payment pattern and extra positive details to balance the file.

Do Charged-Off Accounts Count Like Collections?

• They’re treated the same way but usually have a smaller effect if you have more recent positive accounts.

Can Gustan Cho Associates Approve Loans With Collections When Other Lenders Can’t?

• Yes, we have no overlays.
• We keep the basic FHA, VA, USDA, Fannie Mae, and Freddie Mac rules simple.

What Does a Mortgage Underwriter Check?

A mortgage underwriter plays a crucial role in the approval process by assessing the borrower’s financial situation and the financed property. Here are the key areas that a mortgage underwriter typically checks:

1. Credit History:The underwriter reviews the borrower’s credit report to evaluate their credit score, payment history, outstanding debts, and derogatory marks such as bankruptcies or foreclosures. A strong credit history demonstrates the borrower’s ability to manage credit responsibly.
2. Income and Employment Verification:The underwriter verifies the borrower’s income through pay stubs, tax returns, W-2 forms, and bank statements. They also confirm the borrower’s employment status and history to ensure stable and sufficient income to support the mortgage payments.
3. Debt-to-Income Ratio (DTI):The underwriter calculates the borrower’s DTI ratio, which compares their monthly debt obligations to their gross monthly income. Lenders have maximum DTI limits, and a lower DTI ratio indicates a lower risk of default.
4. Assets and Reserves:The underwriter reviews the borrower’s assets, such as savings, investments, and retirement accounts, to assess their ability to cover down payments, closing costs, and future mortgage payments. Reserves refer to the amount of money the borrower has left after closing, which provides a cushion for unexpected expenses.
5. Property Appraisal:The underwriter reviews the appraisal report to ensure the property’s value supports the loan amount. They also check for any issues affecting the property’s marketability or insurability.
6. Loan Documentation:The underwriter examines all loan documents, including the loan application, purchase contract, title report, and disclosures, to ensure compliance with lending guidelines and regulations.
7. Risk Assessment:The underwriter assesses the overall risk of approving the mortgage loan based on the information gathered. Factors like creditworthiness, income stability, property value, and loan structure are carefully evaluated to make informed decisions.
8. Compliance and Regulations:The underwriter ensures that the loan file meets all regulatory requirements, including those set by government agencies such as FHA, VA, USDA, Fannie Mae, and Freddie Mac for conventional loans.

By thoroughly evaluating these factors, the mortgage underwriter determines whether the borrower qualifies for a mortgage and approves the loan based on the lender’s guidelines and risk tolerance.

Do Collections Count for Mortgage?

Collections can indeed impact your ability to secure a mortgage. When applying for a mortgage, lenders scrutinize your credit report to evaluate your creditworthiness. Collections on your report signal outstanding debts passed to collection agencies. These can significantly reduce your credit score, potentially leading to higher interest rates or even denial of your mortgage application.

Lenders’ policies regarding collections vary, with some insisting on clearing collections before approval. In contrast, others may be more flexible, especially for certain collections like medical bills or small amounts.

However, addressing collections positively, such as negotiating payment plans or settlements, can enhance your credit standing and improve your chances of mortgage approval with favorable terms. Improving your credit score and dealing with any outstanding debts is vital before you submit a mortgage application to boost your chances of approval.

Types of Derogatory Credit Tradelines

There are many types of derogatory credit tradelines mortgage loan applicants can have. Mortgage underwriters will analyze the type of late payments and the date of last activity when the last time the borrower was late. Below are the type of credit tradelines borrowers can have where the mortgage underwriter needs to determine the borrower’s regard for credit and history of payment.

1. Non-Medical Collection Accounts
2. Medical Collection Accounts
3. Charge-Off Accounts
4. Late payments
5. Revolving account late payments in the past 12 months
6. Installment account late payments in the past 12 months
7. Mortgage late payment in the past 12 months.
8. Judgments
9. Tax liens

We can briefly discuss how mortgage underwriters calculate judgments and tax liens.

How Do Underwriters View Medical Versus Non-Medical Collections on FHA Loans?

Borrowers do not have to pay off outstanding collection accounts in order to qualify for an FHA loan under HUD mortgage lending guidelines. If outstanding unpaid collection accounts on non-medical collection accounts is greater than $2,000, the following rules apply:

5% of the outstanding collection balance is used as a hypothetical debt for debt-to-income ratio by underwriters. This only applies for non-medical collection accounts and not charge-offs.

Then 5% of the outstanding collection balances of all of the unpaid debts will be used in calculating monthly debt to income ratios. This holds true even though you do not have to pay anything to any creditors

Case Scenario on How Underwriters Calculate Hypothetical Monthly Debt on Collections

For example, if the total balances add up to $10,000 for all of your creditors and/or collection agencies: Then HUD requires 5% of the outstanding unpaid $10,000, or $500, to be used in calculating the borrower’s debt to income ratio.

If the outstanding collection balance is substantially large and the hypothetical 5% of the balance will disqualify the borrower, the borrower can enter into a written payment agreement with the creditor.

The amount mutually agreed upon will be the amount used for the hypothetical collection debt in lieu of the 5%. The $500 per month is a hypothetical debt. it does not need to be paid but will count as a monthly expense for borrowers. Any outstanding unpaid collection account balances under $2,000 that are non-medical collection accounts do not count in calculations of the borrower’s debt to income ratios.

Credit Disputes During Mortgage Process

Mortgage borrowers cannot have credit disputes on any charge-off accounts and non-medical collection accounts if the total of the outstanding collection account balances of all of your collection accounts is greater than $1,000.

Borrowers need to retract all non-medical credit disputes with outstanding collection account balances as well as all charge-off credit disputes before they are able to proceed with the mortgage application and mortgage approval process.

A pre-approval letter should never be issued if there are a lot of credit disputes on a borrower’s credit report. Retracting credit disputes drops the borrower’s credit scores. In the following paragraphs, we will be discussing the top frequently asked questions from our borrowers on how underwriters view collections and other derogatory credit tradelines while they are underwriting the file.

Retracting Credit Disputes Will Lower Credit Scores

How much will retracting credit disputes drop credit scores? That depends on the type of credit disputed item but it can drop significantly. If a home buyer barely qualifies for a 3.5% down payment home purchase FHA Loan with the minimum 580 credit score required and needs to retract credit disputes, chances are that the borrower may no longer qualify.

Derogatory credit tradelines older than two years are exempt from retracting the credit disputes. Non-medical collections with zero balance do not have to be removed. If the total aggregate collection balance from all creditors is $1,000 or less, the credit disputes do not have be removed.

Borrowers with under 580 credit scores can no longer qualify for an FHA loan with a 3.5% down payment. This is because HUD requires the 580 FICO minimum. The mortgage loan officer will help borrowers in boosting credit scores back up after they retract credit disputes. Credit disputes on non-medical collection items with zero credit outstanding balance are exempt. Paid-off collection accounts are exempt. Medical Collection accounts with outstanding balances are exempt from credit disputes and you can have credit disputes on medical collection accounts.

How Underwriters View Collections Versus Charge-Off Accounts

The great news is that HUD does not care about medical collection accounts with outstanding unpaid balances and charge-off accounts. They are not calculated in debt to income calculations of borrowers.  Most charge-off accounts will have a balance reporting on the borrower’s credit report. Mortgage underwriters ignore charged-off accounts.

5% of the outstanding balance due to the credit is used on non-medical collection accounts but NOT medical collections and charge-off accounts.

Underwriters will not use it for debt to income ratio calculations. As mentioned earlier, borrowers cannot have credit disputes on any charge-off accounts. Borrowers need to have the credit disputes on all charge-off accounts for your mortgage loan approval process to proceed.

How Mortgage Underwriters View Judgments

The way how underwriters view collections versus judgments are different. How underwriters view collections is to take 5% of the outstanding collections is used as a hypothetical debt in the even the collection turns into a judgment. Borrowers can have outstanding judgments qualify for FHA loans: HUD  requires borrowers to pay the outstanding tax lien and/or judgment or be on a  written payment agreement.

The way how underwriters view collections versus judgments are different. Judgments need to be addressed before you can proceed with the mortgage collections. How underwriters view collections is a hypothetical 5% rule and not an actual like it is with judgments.

Borrowers with a judgment need to make a written payment agreement with the judgment creditor and show three timely payments have been made. Lenders require borrowers to make three monthly payments on judgments.. You cannot make advanced payments of the three months of payments seasoning required. Fannie Mae and Freddie Mac allow borrowers with judgments to qualify for conventional loans as long as they have a written payment agreement with the judgment creditor and made three timely payments. You cannot have outstanding judgments and qualify for a conventional loan.

Agency Guidelines Versus Lender Overlays

Unfortunately, most mortgage lenders will have additional requirements in addition to the minimum FHA Guidelines On Collection Accounts called FHA Investor Overlays. Most banks will require that you pay off all of your outstanding unpaid collection accounts in order for you to qualify with their institution even though it is not HUD Guideline to pay off your outstanding collection accounts.

Any collection accounts older than two years old really does not have an impact on your credit scores. Old derogatory credit tradelines that are older than 12 months are often not given too much weight by mortgage underwriters.

Paying off your older collection accounts will drop your credit scores This is because it re-activated your aged dormant collection accounts and re-activates them like it is recent activity. To qualify with a lender licensed  in 48 states, including Washington, DC, and Puerto Rico with no overlays, please contact us at 800-900-8569. Text us for a faster response. You  can email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, evenings, weekends, and holidays to take your calls and answer any questions you may have.

FAQ based on How Underwriters View Collections on Mortgage Loans

Can Homebuyers Qualify For an FHA Loan With Outstanding Collections and Charged-Off Accounts?

• Homebuyers can qualify for an FHA loan with outstanding collections and charged-off accounts.
• However, how underwriters view collections and charge-off accounts depends on the lender’s guidelines.

Do Underwriters Require Collections to be Paid Off For FHA Loans?

• Underwriters only sometimes require collections to be paid off for FHA loans, especially if the lender has no overlays on collection accounts.
• However, non-medical collections may require 5% of the outstanding balance for debt-to-income ratio calculations.

What are The Differences Between Medical and Non-Medical Collections For FHA Loans?

• Medical collections are typically exempt from debt-to-income ratio calculations, while non-medical collections may require 5% of the outstanding balance to be considered in calculations.

How Do Underwriters View Judgments and Tax Liens For FHA Loans?

• Underwriters may require outstanding judgments and tax liens to be paid or be on a written payment agreement for FHA loan approval.

What are Lender Overlays on Collection Accounts?

• Lender overlays are additional requirements lenders impose beyond the minimum FHA guidelines.
• Some lenders may require borrowers to pay off all outstanding collection accounts even if it’s not a HUD guideline.

Do Older Collection Accounts Impact Credit Scores For Mortgage Approval?

• Collection accounts older than two may have less impact on credit scores, but paying off older collection accounts can sometimes temporarily lower credit scores.

How Can Borrowers Qualify For an FHA Loan Without Lender Overlays on Collection Accounts?

• Borrowers can contact lenders with no overlays, such as Gustan Cho Associates, to explore FHA loan options without additional requirements on collection accounts.

Qualifying for an FHA loan with outstanding collection and charged-off accounts. We will cover the difference between medical versus non-medical collections. We will also cover on qualifying for a mortgage with unpaid judgments and tax-liens. HUD, the parent of FHA, has the most lenient guidelines when it comes to bad credit.