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Collections and charge-offs on a credit report don't automatically disqualify an FHA borrower, but they do trigger specific documentation and, above certain thresholds, resolution requirements. Understanding where the lines fall can save weeks of back-and-forth during underwriting.
The $2,000 aggregate collections rule
HUD Handbook 4000.1 requires the underwriter to add up the outstanding balances of all non-medical collection accounts. Medical collections are excluded from this calculation entirely, no matter the balance.
If the combined non-medical collection balance is $2,000 or more, one of the following must apply:
- The accounts are paid in full at or before closing, or
- The borrower has a documented payment arrangement with the creditor, and the monthly payment is included in DTI, or
- On manually underwritten loans where no payment arrangement exists, the underwriter must add a monthly obligation equal to 5% of each outstanding collection balance into the borrower's DTI.
Below the $2,000 aggregate, collections generally do not have to be resolved before closing, though the TOTAL Scorecard may still flag the file for manual review, and individual lenders may apply their own overlays that are stricter than HUD's minimum.
Charge-offs
Charge-off accounts (debt a creditor has written off as unlikely to be collected) are not subject to the same $2,000 payoff trigger as collections. FHA does not require charge-offs to be paid as a blanket rule, but underwriters review the pattern and recency of charged-off accounts as part of the overall credit evaluation, particularly on manually underwritten loans, where a pattern of charge-offs can work against the compensating-factors analysis described in our manual underwriting guide.
Disputed accounts
If a borrower is disputing accounts with an aggregate balance of $1,000 or more, the underwriter must investigate the basis of the dispute. This applies to disputed collections, charge-offs, and other derogatory tradelines. Depending on findings, the underwriter may:
- Require the dispute be resolved before closing,
- Treat the account per the normal collection or charge-off rules if the dispute lacks merit, or
- Proceed if the dispute is well-documented and does not affect creditworthiness.
Disputing accounts mid-transaction can also cause a credit score to be suppressed or a new score to be pulled, which can change loan eligibility. Borrowers close to a credit-score cutoff should generally avoid initiating new disputes once they are under contract — see our credit score requirements guide for score minimums.
Judgments
Any outstanding judgment must be resolved before FHA will insure the loan. Acceptable resolutions:
- Paid in full, or
- A documented repayment plan with the creditor, with at least three months of timely payments verified, and the payment amount included in DTI.
A judgment left unaddressed is a hard stop, not a documentation footnote.
Federal tax liens and delinquent federal debt
Borrowers with delinquent federal non-tax debt (student loan defaults, for example) or federal tax liens are generally ineligible for FHA financing unless:
- A satisfactory repayment arrangement is in place with the creditor agency or IRS,
- At least three months of payments have been made on time, and
- The payment is included in the DTI calculation.
A tax lien with a Notice of Federal Tax Lien filed but an active, documented IRS installment agreement in good standing can still allow FHA approval; an unaddressed lien cannot.
Checklist: resolving derogatory credit before you apply
- [ ] Pull all three credit bureaus and list every collection, charge-off, judgment, and lien
- [ ] Separate medical collections from non-medical collections
- [ ] Add up non-medical collection balances — is the total at or above $2,000?
- [ ] For any balance above $1,000 you plan to dispute, weigh the timing risk against the potential benefit
- [ ] Confirm any judgment is either paid or under a documented, seasoned repayment plan
- [ ] Confirm any federal tax debt has a written, seasoned IRS repayment agreement
- [ ] Get payoff or payment-plan documentation in writing for the loan file, not just verbal confirmation
Worked example (illustration only)
A borrower has three non-medical collection accounts: $650, $900, and $700, plus one $1,200 medical collection.
| Account | Type | Balance | Included in $2,000 test? |
|---|---|---|---|
| Collection A | Non-medical | $650 | Yes |
| Collection B | Non-medical | $900 | Yes |
| Collection C | Non-medical | $700 | Yes |
| Collection D | Medical | $1,200 | No — excluded |
Non-medical aggregate: $650 + $900 + $700 = $2,250, which is above the $2,000 threshold. Without a payoff or a payment plan, and on a manually underwritten file, the underwriter would add 5% of each balance monthly: (5% × $650) + (5% × $900) + (5% × $700) = $32.50 + $45 + $35 = $112.50/month added to DTI. The $1,200 medical collection is excluded from this calculation entirely regardless of its balance.
Where this fits in your bigger picture
Resolving or documenting derogatory credit early avoids last-minute underwriting conditions. Run your numbers through our FHA mortgage calculator once you know your likely DTI, and review our FHA requirements overview for how credit, down payment (including gift funds), and mortgage insurance (FHA MIP guide) fit together in a full FHA approval.