Can I Get a Mortgage With Unpaid Collections?

Unpaid collections can present a hurdle for individuals seeking a mortgage, yet they do not automatically disqualify a prospective homebuyer. An unpaid collection is an overdue debt a creditor has transferred or sold to a collection agency because the original payment was not received. While such accounts on a credit report indicate past financial difficulties, understanding their impact and how various mortgage programs view them can help navigate the path to homeownership.

How Collections Influence Mortgage Eligibility

Lenders use credit scoring models, such as FICO scores, to assess creditworthiness. The presence of collections can cause a notable decrease in these scores, which are a primary factor in determining mortgage qualification and interest rates. Lenders view collections as indicators of past inability to manage financial obligations, increasing perceived risk.

If a lender requires a payment arrangement for an outstanding collection, the monthly payment obligation will be included in the applicant’s debt-to-income (DTI) ratio. This ratio compares total monthly debt payments to gross monthly income, and a higher DTI can limit the mortgage amount or lead to denial if it exceeds program-specific thresholds. Some lenders and loan programs differentiate between medical and non-medical collections, viewing medical collections with more leniency due to their unexpected nature. Older collections may have less impact than recent ones, but they remain on credit reports for seven years from the date of original delinquency, and can still influence a lender’s assessment.

Strategies for Addressing Unpaid Collections

Before applying for a mortgage, it is prudent to obtain and review credit reports from all three major credit bureaus: Equifax, Experian, and TransUnion. This step helps identify all reported collections and verify their accuracy. Should a collection appear to be incorrect, not belonging to the individual, or beyond the applicable statute of limitations, it is important to dispute the inaccuracy with the credit bureau and the collection agency. Accurate and timely disputes can lead to the removal of incorrect items, potentially improving credit standing.

Paying off collections is a direct way to address them, though the method of payment can influence how it appears on a credit report. While some consumers attempt a “pay for delete” negotiation to have the collection removed from their report, this is not guaranteed as collection agencies are not obligated to remove accurate information. A more common outcome is for the account to be updated to “paid in full,” which is viewed more favorably by lenders than an unpaid status. It is important to obtain written confirmation of any payment or agreement.

Alternatively, settling a collection for less than the full amount can resolve the debt, though it may be reported as “settled” rather than “paid in full,” which lenders might view less favorably. Any settlement agreement should be in writing, outlining the agreed-upon amount and terms. Maintaining meticulous records of all communications, payments, and agreements related to collections is essential.

Mortgage Loan Programs and Collections

Different mortgage loan programs have varying guidelines regarding unpaid collections. Conventional loans typically have stricter requirements, while FHA and VA loans are often more forgiving. Understanding these program-specific rules is crucial for navigating the mortgage application process.

Conventional Loans

For conventional loans, which are not government-backed, the guidelines are generally more stringent. Medical collection accounts are typically not required to be paid off at or prior to closing, regardless of their amount, for both automated and manually underwritten loans. However, for non-medical collection accounts and non-mortgage charge-off accounts, if they exceed $250 individually or $1,000 in aggregate, they generally must be paid in full at or prior to closing. For single-unit principal residences, borrowers are not usually required to pay off outstanding collections or non-mortgage charge-offs, regardless of the amount. Conventional loans do not apply a hypothetical 5% of the collection balance to the debt-to-income ratio, unlike some other loan types.

FHA Loans

FHA loans, insured by the Federal Housing Administration, offer more flexibility for borrowers with collections. FHA guidelines generally do not require borrowers to pay off medical collections. These are excluded from the debt-to-income (DTI) ratio calculation, regardless of the balance. For non-medical collection accounts, if the total outstanding balance is $2,000 or greater, FHA requires lenders to factor 5% of the total outstanding balance as a hypothetical monthly payment into the borrower’s DTI ratio, even if the borrower is not actively making payments. Alternatively, if a payment plan has been established for these non-medical collections, the actual agreed-upon monthly payment can be used in the DTI calculation. FHA does not mandate that charged-off accounts be paid off to qualify for a loan.

VA Loans

VA loans, guaranteed by the Department of Veterans Affairs, are often the most lenient regarding collections for eligible veterans. VA guidelines generally do not require veterans to pay off outstanding delinquent collection or charged-off accounts. The VA emphasizes the borrower’s overall credit history and ability to manage current debts. While collection accounts are considered part of the borrower’s overall credit history, and unpaid ones are seen as open, recent credit, they do not necessarily need to be paid off. If the outstanding balance of non-medical collections is greater than $2,000, lenders might include 5% of that balance as a monthly debt in the DTI calculation, similar to FHA. However, many lenders may have “lender overlays” that impose stricter requirements than the VA’s minimum guidelines, such as specific credit score minimums or requirements to pay off certain collections.

USDA Loans

USDA loans, provided by the U.S. Department of Agriculture, also have specific rules for collections. For USDA loans, if the total outstanding balance of all non-medical collections is equal to or greater than $2,000, the borrower may be required to pay these accounts in full prior to closing. Alternatively, payment arrangements can be made with each creditor, and the agreed-upon monthly payment will be included in the borrower’s DTI ratio. If no payment arrangement exists, the lender may use a calculated monthly payment, often 5% of the outstanding balance, for DTI purposes. Medical collections and charge-off accounts are typically removed from the total balance calculation if they are clearly identifiable on the credit report. USDA does not require medical collection accounts or charge-off accounts to be paid.