FHA Mortgage Guidelines on Collection Accounts

FHA Mortgage Guidelines on Collection Accounts: How to Qualify for a Home Loan in 2025

Buying a home with collection accounts on your credit report? You’re not alone. Many borrowers worry that old debts will stop them from qualifying for a mortgage. But here’s the good news: FHA mortgage guidelines on collection accounts allow homebuyers to get approved without paying off all outstanding collections.

This guide will simplify how the FHA handles collection accounts. We will talk about the new updates to the regulations and provide advice on how to increase your chances of getting an FHA loan, even if collections are listed on your credit report. We’ll also highlight the FHA mortgage guidelines on collection accounts so you can understand what they mean.

Do You Need to Pay Off Collection Accounts to Get an FHA Loan?

No! FHA mortgage guidelines on collection accounts do not require borrowers to pay off collections to qualify for a home loan. However, lenders have different requirements. Some mortgage lenders will approve you based on FHA’s rules, while others have their own stricter guidelines called lender overlays.

The reason why most lenders have overlays on unpaid collection accounts is that they are concerned that unpaid collection accounts can turn into judgments.

A judgment is the worst credit-derogatory item consumers can have. A judgment is a court’s decision that a debtor owes a judgment creditor money. Courts give authorization to the judgment creditor to proceed with legal proceedings such as the following:

• attaching liens on assets
• garnishing bank accounts and wages
• to enforce the judgment, creditors need to follow the legal process

At Gustan Cho Associates, we have no lender overlays on FHA loans. You can qualify if you meet FHA’s minimum requirements—even with unpaid collections.

Medical vs. Non-Medical Collection Accounts

When it comes to FHA mortgage guidelines on collection accounts, it’s important to know that they handle medical and non-medical debts in different ways. Understanding how these guidelines apply to your collection accounts helps you see if you’re on the right track.

✅ Medical Collection Accounts:

• Do not impact your debt-to-income ratio (DTI)
• No payment is required for loan approval
• No need to set up a repayment plan

❌ Non-Medical Collection Accounts:

• If the total balance is under $2,000, it will not impact your loan approval.
• If the total balance is $2,000 or more, FHA requires lenders to factor 5% of the total into your DTI.
• Example: If you have $10,000 in non-medical collections, $500 per month will be added to your debt calculations.
• Solution: Instead of using the 5% rule, you can set up a written payment plan with the creditor, and the agreed-upon monthly payment will be used in your DTI calculation instead.

What If I Have Charged-Off Accounts?

A charged-off account is a debt the creditor has given up on collecting, but it still appears on your credit report. FHA mortgage guidelines on collection accounts do not require you to pay off charge-offs to qualify for an FHA loan.

Important Note: You cannot dispute a charged-off account during the mortgage process. If you have open disputes, you may need to remove them before getting final loan approval.

How Lender Overlays Impact FHA Loan Approvals

While FHA does not require you to pay off collections, some lenders require it as part of their own rules. These extra requirements are called lender overlays.

Many banks and mortgage companies will:

• Require collections to be paid off in full before approving your FHA loan
• Set higher credit score minimums than the FHA requires
• Lower the maximum DTI allowed for approval

At Gustan Cho Associates, we keep things simple by following FHA mortgage guidelines on collection accounts. We don’t add lender overlays that some other lenders use. If you want to get approved, we stick to the official FHA standards, making it easier for you to qualify without facing unnecessary hurdles.

FHA Guidelines on Credit Disputes for Collection Accounts

If you have disputes about your credit that involve collections (not medical), it might create issues when you’re applying for a loan. This is something to keep in mind with FHA mortgage guidelines on collection accounts. To avoid delays or complications, it’s best to sort out any active disputes before applying.

• If the total disputed balance is over $1,000, FHA requires you to remove the dispute before the loan can close.
• Medical collections and zero-balance accounts are exempt from this rule.
• Disputed accounts older than 24 months are not factored into underwriting decisions.

If you need to remove disputes, be prepared for a potential drop in your credit score. Before making changes to your credit report, it’s important to talk to a loan officer.

Debt-to-Income Ratio (DTI) Rules for FHA Loans with Collections

Your Debt-to-Income (DTI) ratio is important when getting approved for an FHA loan. While FHA Mortgage guidelines on collection accounts give some flexibility, each lender may have their own rules that can make it tougher to qualify. So, even if FHA allows higher DTI ratios, you still need to check with your lender about their specific requirements.

✅ FHA’s Maximum DTI:

• Front-end DTI: 46.9%
• Back-end DTI: 56.9%

Some lenders lower these limits and only approve FHA loans if your DTI is under 45%-50%. This is another reason why choosing a lender with no overlays (like Gustan Cho Associates) can improve your chances of approval.

New Credit Scoring Models & How They Affect FHA Loan Approval

Recent changes in credit scoring models (FICO 10 & VantageScore 4.0) have made medical debt less impactful on mortgage approvals.

Key updates:

• Paid medical collections no longer appear on credit reports.
• Unpaid medical collections under $500 are automatically removed.
• Newer credit scores reduce the impact of collection accounts, but most FHA lenders still use older FICO models.

In 2025, the rules are changing to help people who have medical bills in collections. This means that if you have medical collections on your record, you might find getting approved for a loan easier. The new FHA mortgage guidelines on collection accounts give borrowers a better chance at achieving homeownership.

How to Improve Your Chances of FHA Loan Approval with Collections

If you have collection accounts and want to qualify for an FHA loan, follow these steps:

1️⃣ Check Your Credit Report: Ensure no errors or open disputes could delay your loan.

2️⃣ Calculate Your DTI: If you have over $2,000 in non-medical collections, factor in 5% of the balance or set up a payment plan.

3️⃣ Talk to a Lender with No Overlays: Many lenders add extra rules that make qualifying harder. Gustan Cho Associates follows only FHA mortgage guidelines on collection accounts, making approval easier.

4️⃣ Consider a Written Payment Agreement: If your collections raise your DTI too high, negotiate a small payment plan with creditors to lower your calculated debt.

5️⃣ Avoid Paying Off Old Collections Without a Plan: Paying off old collections can lower your credit score by reactivating the debt. Always check with a loan officer before making payments.

Get Pre-Approved for an FHA Loan Today

If you’ve been told you won’t get an FHA loan because of collections on your credit report, you might be dealing with a lender with overlays. At Gustan Cho Associates, we help people who meet FHA mortgage guidelines on collection accounts—even if they have collections or lower credit scores.

🔹 No Lender Overlays

🔹 Low Credit Score Approvals

🔹 FHA Loans with High DTIs

🔹 Fast & Hassle-Free Pre-Approvals

Ready to see if you qualify? Call us today at 800-900-8569 or text us for a faster response! You can also email us at alex@gustancho.com. We’re available 7 days a week, including evenings and holidays, to help you get your home loan!

Final Thoughts on FHA Mortgage Guidelines on Collection Accounts

FHA mortgage guidelines on collection accounts allow borrowers with past financial challenges to buy a home without paying off old debts. However, choosing the right lender is crucial since many impose unnecessary overlays.

If you need an FHA loan with bad credit, high DTI, or collection accounts, contact Gustan Cho Associates today, and let’s make your homeownership dream a reality!

Frequently Asked Questions About FHA Mortgage Guidelines on Collection Accounts:

Q: Do I have to Pay Off Collection Accounts to get an FHA Loan?

A: No, FHA mortgage guidelines on collection accounts do not require you to pay off collections. However, some lenders may have stricter rules, called lender overlays, that require them to be paid.

Q: What’s the Difference Between Medical and Non-Medical Collection Accounts?

A: The difference between medical and non-medical collection accounts are as follows:

• Medical collections do not impact your debt-to-income ratio (DTI) and do not need to be paid.
• Non-medical collections over $2,000 require lenders to count 5% of the balance toward your monthly debt calculations unless you set up a payment plan.

Q: Can I Get an FHA Loan if I have Charged-Off Accounts?

A: Yes! FHA mortgage guidelines on collection accounts do not require paying off charged-off accounts. However, you cannot have active disputes on charge-offs during the loan process.

Q: How do Lender Overlays Affect FHA Loan Approvals?

A: Some lenders add extra rules (overlays) and require collections to be paid off, even though FHA does not. Working with a lender like Gustan Cho Associates, which has no overlays, makes qualifying easier.

Q: How do Collections Affect my Debt-to-Income (DTI) Ratio for an FHA Loan?

A: As per FHA mortgage guidelines on collection accounts:

• Medical collections do not count toward DTI.
• Non-medical collections under $2,000 do not impact your loan approval.
• Non-medical collections over $2,000 will count 5% of the balance toward your monthly debts unless you set up a payment plan.

Q: What Happens if I have Disputes on Collection Accounts?

A: FHA does not allow open non-medical collection disputes over $1,000 during the loan process. You may need to remove disputes before final approval. However, medical collections and accounts older than 24 months are exempt.

Q: How do New Credit Scoring Models Affect FHA Loans?

A: New scoring models:

• Paid medical collections no longer appear on credit reports.
• Unpaid medical collections under $500 are automatically removed.
• Newer credit scores reduce the impact of collections, but most FHA lenders still use older scoring models.

Q: How Can I Improve my Chances of Getting an FHA Loan with Collections?

A: Do the following to improve your credit score:

• Check your credit report for errors or open disputes.
• If you have over $2,000 in non-medical collections, consider a payment plan to lower your DTI.
• Work with a lender like Gustan Cho Associates that follows only FHA mortgage guidelines on collection accounts (no overlays).

Q: Should I Pay Off my Old Collections Before Applying for an FHA Loan?

A: Not necessarily. Paying off old collections can lower your credit score by reactivating the debt. Talk to a loan officer before making payments.

Q: Where Can I Find a Lender that Follows Only FHA Guidelines on Collection Accounts?

A: Gustan Cho Associates specializes in FHA loans without lender overlays. Call 800-900-8569 or text for a faster response. You can also email alex@gustancho.com—we’re available seven days a week!

This blog about “FHA Mortgage Guidelines on Collection Accounts” was updated on January 31st, 2025.