FHA Guidelines on Charge-Offs and Collections

FHA Guidelines on Charge-Offs and Collections For 2023

Gustan Cho Associates are mortgage brokers licensed in 48 states

FHA Guidelines on Charge-Offs and Collections allow borrowers with outstanding charged-off accounts to qualify for an FHA loan. You may qualify for FHA financing even if your credit report contains charge-offs or outstanding collection accounts. HUD guidelines do not require paying outstanding collections or charge-offs before obtaining financing

FHA loans are the most popular loan program in the United States for first-time homebuyers, buyers with higher debt-to-income ratios, those with prior bad credit such as collection and charged-off accounts, and homebuyers with lower credit scores. In the following paragraphs, we will discuss and cover FHA guidelines on charge-offs and collections for 2023.

FHA Loans With Unpaid Debts

YouTube player

HUD is the parent of FHA. HUD is the giant federal agency administering the FHA loan program. HUD loans are not loans originated by HUD.

Many people refer to HUD loans because HUD insures mortgage lenders in the event borrowers default on FHA loans. HUD has lenient guidelines on collections accounts. Homebuyers do not have to pay unpaid debts to qualify for FHA loans.
FHA Loans With Unpaid Debts

Can I Buy a Home With a  Charge-Off?

YouTube player

It is easier to get an approve/eligible decision from an automated underwriting system (AUS) with FHA loans than it is for any other government and conventional loan program. 

However, the key to getting FHA mortgage approval is to have been timely on all monthly payments in the past 12 months. Gustan Cho Associates are experts in helping borrowers with prior bad credit, lower credit scores, and outstanding charged-off accounts.

See if you qualify for a mortgage now

What Are Charged-Off Credit Accounts?

Disputed Charge-offs and Collections

Charge-Off Accounts are creditors who deem the consumer’s credit account as not collectible and charge it off on their books. After six months, most credit card companies will charge off a consumer who does not pay on their revolving credit card account.

Just because a credit account is charged off does not mean it relieves the consumers of the debt. Charged-off accounts can be sold to third-party collection agencies.

Can I Get a Mortgage With a Charge-Off?

YouTube player

Borrowers can qualify for FHA loans with outstanding charge-off accounts without settling the charge-offs or paying off the charge-off accounts according to FHA Guidelines on Charge-Offs.

HUD charge-off guidelines state that an FHA Borrower must not pay off outstanding charge-off accounts or collection accounts to qualify for an FHA loan.

Do All Lenders Have The Same FHA Charge-Off Guidelines?

YouTube player

Many lenders have lender overlays on charge-offs and collection accounts. Charge-Offs are when a creditor has tried to collect on a debt owed by a consumer and has written off the debt. 

A charged-off account does not mean it relieves the consumer of the debt. The consumer is still liable for the debt, and the creditor can always go after the consumer for the amount of the charged-off account. In the following paragraphs, we will cover and discuss HUD guidelines on charged-off accounts.

Does HUD Require Charge-Offs To Be Paid on FHA Loans?

There are two types of FHA guidelines for charge-offs and collections.  All lenders require borrowers to meet minimum guidelines established by the US Department of Housing and Urban Development (HUD). HUD administers FHA programs, including mortgage guarantees. 

However, those agency guidelines are the minimum that borrowers must meet. Mortgage lenders often set stricter underwriting guidelines than required by HUD. The purpose is to reduce the number of loans that end up in default. If a lender has too many loans that end up in foreclosure, even if it follows FHA guidelines, it can lose its FHA approval. 

FHA Loans For Bad Credit With Charged-Off Accounts

These additional requirements, called “lender overlays,” are not illegal. Most mortgage companies have lender overlays on government and conventional loans. Lenders can be as strict as they want as long as they comply with the minimum standards established for the FHA program and don’t break any fair lending laws. 

FHA program guidelines do not require borrowers to pay off collections or charge-offs before funding a loan. But many lenders do require this. Gustan Cho Associates does not have overlays for FHA financing or any other mortgage program. We follow FHA Guidelines on Charge-Offs and Collections and have zero lender overlays.

Related: How Do Mortgage Lenders View Charge-offs?

FHA Loans With Collection Accounts

Lenders can ignore non-medical collection accounts if their balances are less than $2,000. You will have to write a letter explaining why your non-medical bills ended up in collection so that the lender can determine if the collection account or judgment resulted from your disregard for financial obligations, inability to manage debt, or extenuating circumstances (not your fault).

Best FHA Lenders For Borrowers With Charged-Off Accounts

Some individual lenders require you to pay these accounts before closing an FHA home loan.  You can either pay them or find a lender that doesn’t have this overlay. 

If unpaid non-medical collection accounts exceed $2,000, HUD requires mortgage underwriters to add 5% of the balance to your monthly debt payments when qualifying you for financing.

FHA Loans For Bad Credit

Even if you don’t plan to pay the collection, underwriters will treat the debt like you will pay 5% of the monthly balance. This can cause your debt-to-income (DTI) ratio to be too high to qualify for financing.  If adding a 5% payment will derail your mortgage approval, you could enter into a written payment agreement with the collection agency.

Negotiate a payment low enough to allow you to qualify for your home loan.  Note that negotiating repayment of an old collection can hurt your credit score because new activity increases the weight of a derogatory entry on your credit report. 

Related: FHA Lender Overlays

FHA Guidelines on Charge-Offs and Collections on Medical Credit Tradelines

YouTube player

Medical collections are treated differently than non-medical collection accounts. The 5% rule does not apply. No matter how high the balance is, FHA underwriters do not apply a monthly payment to your DTI calculation. 

No matter how much the medical collection account outstanding balance is, FHA guidelines do not require lenders to include a payment in your DTI ratio.  Unless your mortgage lender has an overlay requiring payment of medical collections, underwriters will probably ignore them.

Related: How to Get an Approve/Eligible Decision With Automated Underwriting Systems

Do Lenders Require Charge-Off Accounts To Be Paid For FHA Loan Approval

Old collection accounts that the creditor deems uncollectible are often listed as “charged off” on your credit report. You most likely still owe the money.

However, FHA guidelines do not require paying outstanding charged-off accounts to qualify for a mortgage. If your lender tells you you must pay a charge-off,  that’s an overlay and not an FHA requirement. You can choose to comply or find another lender. 

FHA Guidelines on Disputed Charge-Off and Collection Accounts

Medical Collection Accounts

Sometimes you might dispute a charge-off, collection, or other derogatory entry on your credit report. Automated underwriting software (AUS) normally excludes disputed accounts. If you’re disputing late payments, collections, or charge-offs, and the total of disputed non-medical accounts is less than $1,000, you don’t have to do anything special, and your application can go through AUS.

FHA Guidelines on Charge-Offs and Collections on Medical vs. Non-Medical Credit Disputes

If your non-medical disputed balances equal to or exceed $1,000 and are not the result of identity theft, a human underwriter must manually underwrite your application. You’ll probably have to explain and document why you’re disputing the account.  Suppose your non-medical disputed accounts result from identity theft, credit card theft, or unauthorized use. In that case, your application can go through AUS if you document the theft, for instance, with a police report.

FHA Loan Approval With Charged-Off Accounts

Homebuyers with outstanding collections and charge-offs don’t need to pay them off unless their lender’s overlays require it.  Per FHA Guidelines on Charge-Offs and Collections, home buyers do not have to pay unpaid debts to qualify for an FHA loan.  For an FHA home loan with no lender overlays, call Gustan Cho Associates at 800-900-8569 or text us for a faster response. Or email us at gcho@gustancho.com. The team at Gustan Cho Associates is available seven days a week, on evenings, weekends, and holidays. 

Prequalify for FHA financing now

FHA Guidelines on Charge-Offs and Collections Versus Lender Overlays

There is a difference between FHA guidelines on charge-offs and collections and what the lender can require. What Are Lender Overlays? Lender Overlays are mortgage lending guidelines instituted by the individual mortgage lender and NOT FHA, VA, USDA, FANNIE MAE, or FREDDIE MAC Guidelines.

All lenders must ensure their borrowers meet the minimum HUD agency guidelines. However, lenders can have higher standards than the minimum HUD agency guidelines. Lenders can have FHA lender overlays on credit scores, collections, charged-off accounts, debt-to-income ratios, and about anything.

FHA Guidelines on Charge-Offs and Collections: Difference Between Charge-Offs and Collection Accounts?

Each mortgage loan program has its own minimum mortgage lending guidelines:


Lenders DO need to meet the minimum mortgage lending guidelines. However, each mortgage lender can have higher mortgage lending standards that surpass the minimum guidelines, which are overlays. These additional higher lending standards are called Mortgage Lender Overlays or Investor Overlays.  HUD guidelines state that charge-offs do not have to be paid and do not count. Borrowers with charge-offs can qualify for FHA loans.

Can Lenders Require Collections and Charge-Offs to Be Paid For FHA Loan Approval?

Typical overlays required by mortgage lenders are the following:

  • Charge-offs cannot exceed $2,000
  • The charge-offs need to be paid
  • 5% of the charge-off balance needs to be calculated on debt-to-income ratios

Charge-offs need a written payment agreement and three months of payment seasoning needs to be made by borrowers.

What Are Charge-Offs? 

How Can You Get Rid of Charged-Off Accounts Reporting on Credit Reports?

Here are ways of getting rid of charge-offs:

  • Pay off the charge-off account
  • Consumers can settle the charge off for less than full face value
  • They can get a paid-off settlement letter from the creditor and make sure that the credit bureaus report it as settled
  • Let the statute of limitations expire
  • The statute of limitations on collections and charge-offs depends on each individual states
  • Filing Chapter 7 Bankruptcy will discharge the charge-offs, and you will no longer be liable for the charge-off accounts

FHA Loans With Collections

The older the charge-off account is, the less likely the creditor will come after consumers for the charge-off account. Charge-off accounts can be sold to third-party collection agencies for pennies on the dollar. So until you pass the statute of limitations on collections and charge-offs, the charge-off accounts can still haunt consumers. Remember that FHA Guidelines on Charge-Offs state that borrowers do not have to pay off charge-off accounts to qualify for an FHA loan. But the lender may have overlays on charge-off accounts and may not qualify you due to charge-offs.

How Charge-Offs Are Reported on Credit Reports

How Are Charge Offs Reported On Credit Reports

I get many calls from borrowers who were told by their loan officers that they knew that FHA Guidelines on Charge-Offs do not count, but the borrower does not qualify because their charge-offs have a balance. The loan officer does not know how to read credit reports.

  • The borrowers who came to me for consultation were told that they would qualify if the charge-offs had zero balances on them.
  • There are no zero balance charge-offs reported on credit reports

You will have an outstanding balance reported on all consumer credit reports.

Best Mortgage Lenders For Bad Credit With Low Credit Scores

With charged-off accounts, there are requirements by HUD, the parent of FHA, that need to be paid. Charged-off accounts with balances do not matter when calculating debt-to-income ratios like collection accounts. 5% of the non-medical collection account balances need to be calculated for debt-to-income ratios.

Not with charged-off accounts Borrowers who are told they do not qualify for an FHA loan due to having charge-off accounts on the credit report, contact us at Gustan Cho Associates at 800-900-8569 or text for a faster response. Or email us at gcho@gustancho.com. Borrowers can also email us at gcho@gustancho.com 7 days a week, evenings, weekends, and holidays. Gustan Cho Associates is available to take calls or email mortgage inquiries. We represent a five-star national mortgage lender with no overlays on FHA, VA, USDA, and Conventional loans.

This blog on FHA Guidelines on Charge-Offs and Collections was updated on November 28th, 2022.

Similar Posts