Qualifying for a home loan with collections, charge offs or judgements

Qualifying for a Home Loan with Collections, Charge Offs or Judgements

A lot of people have had money challenges in the past, resulting in a collection, charge-off, or judgment showing up on their credit report.

It’s not as bad as you might think most of the time.

Your Credit Score’s Importance In Qualifying For A Mortgage

Many people think their credit score is the only important thing underwriters look at when determining whether to grant you a mortgage. But actually, they go much deeper than that, into the specific items that make up your credit score.

This actually can work in your favor because some collections, judgments, and other credit problems that severely hurt your credit score aren’t considered in underwriting or aren’t weighted as strongly as the credit scoring companies do in calculating your score. I’ll discuss these in this article.

Before we get into the nitty gritty of each type of collection, judgment, or write-off, may I make a suggestion? This is confusing, complicated stuff. You can research online and may end up getting the right answer, or you may not. 

You really could use advice from an expert to give you accurate answers. We hate it when we hear of people not buying because they’ve made assumptions or have been denied by a lender who doesn’t accurately understand the rules.

The solution to this is simple – if you’re worried about judgments, collections, chargeoffs, foreclosures, bankruptcy, tax liens, preforeclosures, or any other negative credit-related issue, we can give you a Second Opinion Here.

While we can’t always guarantee to give you good news, we can guarantee that we will do everything we can to help you get into a mortgage and home. 

So you know, underwriters use one of two tools to analyze your mortgage credit worthiness: Destktop Underwriter (DU) or Desktop Originator (DO). These tools automatically consider and weigh certain aspects of your credit history and ignore other parts.

Below, you will find some of the exclusions from DU which includes charge-offs and medical collections that will not be counted against you and are not required to be paid off.

Collections, Chargeoffs, and Judgements – Timing is Important

Timing is an important factor in determining how past collections will affect your approval.  DU generally ignores anything older than 24 months, so it will not affect your ability to qualify for a mortgage.

Need a Second Opinion? Click Here for Help!

Don’t Pay Off Old Collection Accounts

Another important credit preservation fact is that you should not try to pay off old collection accounts.

Sometimes, advice is given to pay off old collection accounts, which only results in a temporary drop in your credit score as an aged delinquent account becomes a recent delinquent account as the status changes to “paid collection.”

It is usually best to leave accounts alone that are older than 24 months old.

Fannie Mae Collections Guidelines for Conventional Loans

Past-Due, Collection, and Charge-Off of Non-Mortgage Accounts – Accounts that are reported as past due (not reported as collection accounts) must be brought current.

If you have brought past-due accounts current, but they aren’t showing that way on your credit report, this could be an inaccuracy on the credit report that can be corrected.

Collections or Chargeoffs – Fannie Mae

For one-unit, principal residence properties, borrowers are not required to pay off outstanding collections or non-mortgage charge-offs, regardless of the amount.

Note: If the lender marks the collection account Paid By Close in the online loan application, DU will issue a message in the DU Underwriting Findings report stating that the collection must be paid.

For two-to-four unit owner-occupied and second home properties, collections and non-mortgage charge-offs totaling more than $5,000 must be paid in full prior to or at closing.

For investment properties, individual collection and non-mortgage charge-off accounts equal to or greater than $250 and accounts that total more than $1,000 must be paid in full prior to or at closing

Risk Factors Considered by DU

Public Records, Foreclosures, and Collection Accounts

If your credit history includes any significant derogatory credit event, you could be considered high risk.

Significant derogatory credit events include

  • bankruptcy filing
  • foreclosure
  • deed-in-lieu of foreclosure
  • pre-foreclosure sale
  • mortgage charge-off
  • judgments
  • accounts that have been turned over to a collection agency

The more recent such events occurred, the more adverse the impact is on the credit profile.

Although most public record information is retained in the credit history for seven years (ten years for bankruptcies), as time passes, it does become less significant to DU’s credit evaluation.

Have Mortgage Questions? We Can Help! Click Here

FHA Collections Guidelines on Judgments (TOTAL)

Judgment refers to any debt or monetary liability of the Borrower and the Borrower’s spouse in a community property state unless excluded by state law, created by a court, or other adjudicating body.

Judgements – FHA

Your Lender must verify that court-ordered Judgments are resolved or paid off before or at closing. Judgments of a non-borrowing spouse in a community property state must be resolved or paid in full, except for obligations excluded by state law.

Exception: A Judgment is considered resolved if the Borrower has entered into a valid agreement with the creditor to make regular payments on the debt, the Borrower has made timely payments for at least three months of scheduled payments, and the Judgment will not supersede the FHA-insured mortgage lien.

FHA Collections Guidelines:  Obligations Not Considered Debt

  • medical collections
  • federal, state, and local taxes, if not delinquent and no payments are required
  • automatic deductions from savings, when not associated with another type of obligation
  • Federal Insurance Contributions Act (FICA) and other retirement contributions, such as 401(k) accounts
  • collateralized loans secured by depository accounts
  • utilities
  • child care
  • commuting costs
  • union dues
  • insurance, other than property insurance
  • open accounts with zero balances
  • voluntary deductions, when not associated with another type of obligation

Collections and Open Derogatory accounts should follow DO or DU findings.

VA Collections Guidelines on Derogatory Credit

In the circumstances not involving bankruptcy, satisfactory credit is generally considered to be reestablished after the veteran, or veteran and spouse, have made satisfactory payments for 12 months after the date the last derogatory credit item was satisfied.

For example, assume a credit report reveals several unpaid collections, including some which have been outstanding for many years.

Once the borrower has satisfied the obligations and then makes timely payments on subsequent obligations for at least 12 months, satisfactory credit is reestablished.

Collections: Isolated collection accounts do not necessarily have to be paid off as a condition for loan approval. For example, a credit report may show numerous satisfactory accounts and one or two unpaid medical (or other) collections.

In such instances, while it would be preferable to have collections paid, it would not necessarily be a requirement for loan approval.

However, collection accounts must be considered part of the borrower’s overall credit history, and unpaid collection accounts should be considered open, recent credit.

Borrowers with a history of collection accounts should have reestablished satisfactory credit (see the previous paragraph) to be considered a satisfactory credit risk.

Need a Second Opinion? Click Here for Help!

Remove Disputes on Credit Report

All disputed items on your credit report need to be removed before submission to an underwriter.

You can have disputes removed by contacting the company that put the disputes on for you, or you can contact the credit agencies directly and ask to have the dispute removed.

If a dispute is on a recent delinquent account, it could affect your credit score once the dispute is removed.  Most older disputes will not affect your credit score in my experience.

Frequently Asked Questions About Collections, Charge-Offs, And Judgements

How do underwriters find judgments?

Judgments are reported in the public records portion of your credit report, on your initial application, in your paycheck stub, and on your bank statements. Underwriters are trained to spot and figure out what’s going on with judgments. Judgments found during underwriting are considered according to the guidelines for the type of loan you are applying for, as shown above. 

Can you get a mortgage with collections?

You certainly can if the collections are more than two years old or if the collections are due to medical and other issues. And you may be able to even if they are new. This is something you’ll want to discuss with us so that we can give you specific answers to your questions. 

Can you get a mortgage with a charge off?

It depends. If the charge off was a non-mortgage-related charge off or was for medical bills, you most likely can. How other types of charge-offs are handled differs by the type of loan you are applying for. We’ve summarized those in this article, but they’re confusing enough that we suggest you contact us. We’ll give you a definitive answer and help you find a lender that will work with you to do everything possible to get you into a home. 

Need a Second Opinion?

The most important thing to remember is that medical collections and charge-offs are generally not counted against you.

If you’re doing this research to try to figure out if you should even try to get pre-approved, don’t get pre-approved, it’s probably not as bad as you think.

Need a second opinion?  We can help! You can Ask Your Question here, and we will connect you with a Mortgage Expert in your area that can help, or you can find a Mortgage Expert Near You below this article.

About the Author

Scott Schang

A 20+ year veteran of the Mortgage and Real Estate industry, I am passionate about educating and empowering consumers. I have been writing about consumer protection issues and making sense of complicated real estate and mortgage topics on this website since 2007

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  • Maria Delgadillo says:

    Hello, under writer denied my conventional loan because I was asking to borrow money and refinance to pay off a collection agency on a second balloon rider loan, but at the end the under writer denied my application saying that if there was no charge off dat found that they would not approve my loan, and now I an on a 3 month pre foreclosure because I as not able to get the loan approved to pay the collection agency. I woulds like to get a second opinion as I was doing everything right to pay the collection agency. Thank u

    • Scott Schang says:

      Hi Maria, there are programs that can help with this if you have enough equity. I am going to send you an email. I need to know what State you live in, and I can connect you with someone that can give you a second opinion.

  • Alyssa says:

    Hi Scott, I stumbled across this page after tirelessly searching for answers to questions I had about charge-offs and stumbled upon your site. I’ll try to make this long story as short as possible. Basically, we want to buy a house now, as house prices are dramatically increasing where we live and we know soon, we probably wont be able to afford a nice newer home if we wait very long. We applied back in November, got denied and was sent a generic denial letter saying “bankruptcy and charge off” were the reasons why…. Fast forward to now, February 2022, we applied with a bank and a mortgage broker both. The lender for the bank told us that we’re fine with FHA as far as our bankruptcy goes (3.5 years old) but that an FHA loan is absolutely out of the question since we have a charge off with an unpaid balance of 21k on there, and that you can’t get approved for an FHA loan with more than 2k in unpaid debt. He said we can try conventional, as they aren’t quite as picky about that, but that we will have to wait 6 more months until we hit our 4 year mark on our bankruptcy, and even then it’s not a guarantee because of the charge off…. Then the mortgage broker we talked to said our credit is in great shape (high 600’s) considering the bankruptcy and charge off, but that we need to wait one more month until we hit that 24 month mark for the charge off (that will be when it’s been older than 24 months). She told us she could get us approved for either type of loan. My husband and I are so very confused. 2 very very different answers and we have CONSTANTLY gotten different answers on how that charge off will ultimately affect us. We feel very left in the dark, and just wish we could get an ACCURATE understanding of how that will affect us. Unfortunately waiting 7 years for that to fall off before buying a house just isn’t an option for us… any answers or advice on this would be so greatly appreciated. And one other very quick question- how do lenders typically decide what price range of houses to lend? Is there a certain income bracket you have to be in before they’ll consider you for higher priced houses?

    • Scott Schang says:

      Hi Alyssa, the FHA waiting period after a bankruptcy is only 24 months. Is the charge off on a debt that was included in the bankruptcy?

      DU, which stands for desktop underwriter will ignore charge-offs. Do you know if the broker tried to run the DU automated underwriting system?

      That’s the charge off part. Regarding your question about how much you can get approved for, that is your debt to income ratio.

      A debt to income ratio is the percentage of your taxable income that is committed to debts. FHA has two ratios it’s looking at.

      Your credit cards, car loans, student loans, and anything on your credit report cannot exceed 46.99% of your taxable income. When you add a proposed new mortgage payment, that, added to your debt from your credit report cannot exceed 56.99% of your taxable income.

      It sounds to me like you just need to find someone a little more experienced with the bankruptcy guidelines too.

      If you would like, shoot me an email to scott@findmywayhome.com – let me know what State you’re trying to buy in, and I can connect you with an experienced loan officer that I know and trust.

      I hope this helps?

      • Alyssa says:

        Thank you for your response! I may have caused a little confusion in my first comment. Our bankruptcy is 3.5 years old, so there isn’t much of an issue there. The issue we are having now is a charge off that was put on our credit for a voluntary surrender of a vehicle we had. It was more recent and completely separate from the bankruptcy that we filed years ago. One person is telling us we will never get an FHA loan due to the charge off, and another person is telling us yes, but that we just need to wait that “24 months since last activity” window on it. That’s where all of our confusion comes in. How one person says “you’ll never be able to get an FHA loan with a $21,000 charge off balance unless you wait 7 years till it falls off “…. And the other person is saying “Yes you can, just wait until your 24 months of last activity and you’ll get approved” is very confusing. Like I said, we want to buy now but apparently that isn’t an option?? And as far as the price of houses question I asked- the lady who said we could get approved after the 24 month window said it’d probably be for around 200k… we need quite a lot more so my mother in law is willing to be a non occupant co borrower to hopefully get us approved for more than 200k. If she does do that for us, would that affect her being able to get her own mortgage after she helps us?? Thanks and sorry for so many questions

        • Scott Schang says:

          The 24 months of last activity isn’t a thing with FHA. I’m also not sure why the other lender is guessing instead of just running DU and seeing what the results were. Do you know if any of these loan officers ran this through the Automated Underwriting System?

          The automated underwriting system should ignore the charge-off.

          It sounds like there may be other issues that the loan officer doesn’t know how to address.

          If you would like, I can introduce you to someone I know and trust. It’s really just luck of the draw if you’ll get a loan officer that knows the guidelines, and works for a company that doesn’t add restrictions on top of standard guidelines (overlays).

          • Alyssa says:

            You know, I’m not sure what they did or didn’t do. We just gave them any info they asked for and hoped we could get approved. We were at the mercy of them and whatever answer they came back with. Since we do have some of these “not so great” things on our credit, finding someone who’s familiar with these things would be great. I will email you and give you the details on where we are trying to buy/build.

          • Scott Schang says:

            Yes, I received your email and have introduced you to one of the mortgage experts here on the site. You should hear from David Xie soon if you haven’t already!

            You’re in good hands. Let’s try to figure out why those other loan officers have such different interpretations. We’ll get to the bottom of it!

  • matt says:

    Hello,
    My wife and I are currently buying a house and we are at the conditionally approve stage. But when the mortgage went to underwriting they found that I had a judgement against me from 7 years ago. It was my first auto loan that I had. what are the changes of closing if this is still a thing come our closing date?
    What are some of the opposition that we have? The amount that they have is 10,659 and i do believe this also includes the interest that has occurred over the years.

    • Scott Schang says:

      Hi Matt, both FHA and Fannie Mae/Freddie Mac require that judgments be paid prior to funding a new mortgage loan.

      The reason for this is that a judgment takes priority before a mortgage lien in the event of a default on the loan. Simply said, judgments need to be paid prior to the mortgage lien, and that is not allowed.

      Your best option might be to contact the attorney listed on the judgment and try to settle.

      I know this isn’t what you want to hear, but you’ll want to get in front of this and take care of it right away.

      Hope this helps?