Paying Off Collections and Judgments
We must document reasons for approving a mortgage when the borrower has collection accounts or judgments. The borrower must explain, in writing, all collections and judgments.
If a loan is approved through FHA’s Scorecard and the findings do not require collections to be paid, we will not require unpaid collections to be paid if they are small in nature, do not affect title, and they do not affect the borrower’s ability to repay the mortgage. Please note – depending on the overall file, it will remain underwriter discretion on whether or not the collections can remain open. If the file is manually underwritten, all collections will need to be paid.
FHA does not require that collection accounts be paid off as a condition of mortgage approval. However, court-ordered judgments must be paid off before the mortgage loan is eligible for FHA insurance endorsement.
Exception: An exception to the payoff of a court-ordered judgment may be made if the borrower has:
- an agreement with the creditor to make regular and timely payments, and
- provided documentation indicating that payments have been made according to the agreement, and
- a minimum of 6 months payments (consecutively) have been made.
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 previous paragraph) in order to be considered a satisfactory credit risk.
Account balances reduced to judgment by a court must either be paid in full or subject to a repayment plan with a history of timely payments (minimum of 6 months payment history). For unpaid debts or debts that have not been paid timely, pay-off of these debts after the acceptability of applicant’s credit is questioned does not alter the unsatisfactory record of payment.
Small medical collections will be allowed to remain outstanding. Substantial medical collections are not allowed to remain unpaid. Borrower has established repayment plan (minimum of 6 months) on delinquent accounts and can qualify with payment is allowed.
For “non-medical” collection accounts, use 5% of the balance and include that payment as a liability in calculating DTI.
If a loan is approved through an AUS (DU or LP) and the findings do not require collections to be paid we will not require unpaid collections to be paid if they are small in nature, do not affect title, and they do not affect the borrower’s ability to repay the mortgage. Please note – depending on the overall file, it will remain underwriter discretion on whether or not the collections can remain open.