Can You Buy a House With Collections on Your Credit Report?

Can You Buy a House With Medical Collections on Your Credit Report

Medical collections get the most forgiving treatment across the board in mortgage underwriting, and that's by design. Regulators and lenders both recognize that medical debt is rarely voluntary.

The major credit bureaus (Experian, Equifax, and TransUnion) overhauled their medical debt reporting models in 2023. 

Medical collections under $500 are no longer reported; the bureaus also extended the pre-reporting grace period to a full year. Paid medical collections are also completely removed from credit reports. If a large, unpaid medical collection still remains on your credit report, know that mortgage guidelines still remain forgiving.

FHA Mortgages and Medical Collections

The Federal Housing Administration (FHA) completely ignores medical collections. 

According to the HUD Handbook 4000.1 [Section II.A.4.b.iv(L) for TOTAL Scorecard approvals and Section II.A.5.a.iv(L) for Manual Underwriting], medical collections do not require payment in full. 

Lenders will not require you to establish a payment plan, nor will they calculate a monthly payment to include in your Debt-to-Income (DTI) ratio.

Underwriters don't need to document a reason for approving your FHA mortgage even if you have medical collections on your credit report. 

This carve-out has been HUD policy since 2013 and remains embedded in the current FHA Single Family Housing Policy Handbook 4000.1.

The underlying policy language originates in Mortgagee Letter 2013-24 (Handling of Collections and Disputed Accounts), which states plainly that "medical collections and charge off accounts are excluded from this guidance."

Conventional Mortgages and Medical Collections 

Fannie Mae and Freddie Mac align with the FHA's leniency. 

The Fannie Mae Selling Guide [Section B3-5.3-09] explicitly isolates medical collections from other credit risks. 

Since April 2023 (Announcement SEL-2023-03), lenders do not require medical collections to be paid off before or at closing. 

This applies regardless of the balance amount and whether your loan receives an automated Desktop Underwriter (DU) approval or undergoes a manual underwrite.

Fannie Mae exempts medical collection accounts from required payoff; there is no requirement for a medical collection to be paid in full at or prior to closing, regardless of the balance, for both automated (Desktop Underwriter) and manually underwritten loans. 

This rule (effective since April 2023) is supported by Announcement SEL-2023-03 and detailed in Section B3-5.3-09.

Freddie Mac runs the equivalent analysis through Loan Product Advisor. Similar treatment of medical accounts is outlined under Guide Section 5202.5.

VA Mortgages and Medical Collections 

The Department of Veterans Affairs (VA) provides similar protections. 

The VA doesn't set a minimum credit score, and it never required collections to be paid off. 

An underwriting update effective January 1, 2024 states that VA lenders must go further with medical debt specifically: medical collections and charged-off medical accounts "do not need to be considered in qualifying ratios or when determining the residual income," and their presence "should not be considered when determining an applicant's creditworthiness." 

VA Pamphlet 26-7 [Chapter 4, Section 7] instructs underwriters to completely disregard all identifiable medical collections  and charged-off medical accounts when determining creditworthiness, residual income, or qualifying ratios. 

The VA's own consumer-facing credit FAQ confirms the broader principle that charge-offs and collections don't have to be paid off to close a VA loan.

Note: A separate CFPB rule that would have banned medical debt from credit reports entirely was finalized in January 2025 but was vacated by a federal court in July 2025](), so that broader ban isn't in effect. The bureaus' 2023 voluntary changes remain in place.

Can You Buy a House With Non-Medical Collections on Your Credit Report

Non-medical collections carry significant weight. 

Unpaid credit cards, personal loans, and utility bills sold to a collector signal a willingness to default on consumer obligations. 

Such collection accounts on a mortgage applicant’s credit reports do get real scrutiny, but "scrutiny" doesn't mean "automatic denial."

Underwriting guidelines vary based on cumulative balances and automated underwriting system (AUS) findings.

FHA Mortgages and Non-Medical Collections 

FHA guidelines focus on your cumulative non-medical collection balances. 

As per HUD Handbook 4000.1 [Section II.A.5.a.iv(L)], iIf the combined total of all open non-medical collections is under $2,000, FHA completely ignores them. No payoff or monthly payment calculation is required.

But, once the combined outstanding balance of all non-medical collection accounts (across all borrowers on the loan) reaches $2,000 or more, the underwriter must run a capacity analysis. 

The lender must factor them into your Debt-to-Income (DTI) ratio using one of three options:

• Payment Agreement: If you have an official, written payment agreement with the collector, the lender will use that actual monthly payment amount in your DTI calculation.You will need to provide evidence of an active payment arrangement.

• The 5% Rule: In absence of any arrangement with the collector, the lender assumes a hypothetical monthly payment equal to 5% of the total outstanding balance and adds it to your monthly debts (e.g., a $4,000 collection adds a $200 monthly debt), even if you are not actually required to pay it. 

• Pay in Full: You pay off the collections in full before or at closing

On manually underwritten loans, you'll also need a letter of explanation for each collection regardless of amount. 

If the TOTAL Mortgage Scorecard returns an “Accept/Approve,” no letter is required, but the $2,000 capacity-analysis rule still applies regardless of the AUS recommendation.

Conventional Mortgages & Non-Medical Collections 

Conventional loan guidelines draw the line by property type and outstanding balance for non-medical collections on a mortgage applicant’s credit report.

According to the Fannie Mae Selling Guide [Section B3-5.3-09]:

• One-Unit Primary Residences: A DU "Approve/Eligible" finding generally waives the requirement to pay off non-medical collections. Outstanding collections and non-mortgage charge-offs don't have to be paid off no matter the amount.

• 2-4 Unit & Second Homes: Total collections exceeding $5,000 must be paid off.

• Investment Properties: Investment properties get stricter treatment; per B3-5.3-09 (DU Credit Report Analysis), individual collection or charge-off accounts of $250 or more, and aggregate totals over $1,000, must be paid in full prior to or at closing.

• Manual Underwriting: For manually underwritten loans, the guidelines align exactly with automated rules. Under Section B3-5.4-03 (Review of Credit History), non-medical collections on a 1-unit primary residence do not require payoff regardless of the amount. The stricter threshold of individual accounts over $250 or a cumulative total over $1,000 applies strictly to investment property manual files.

Freddie Mac’s guidelines mirror that of Fannie Mae. 

Freddie Mac evaluates collections through Loan Product Advisor and its manual-underwriting requirements in Guide Sections 5202.1 and 5203.2.

While their official written guidelines are mirrored, the actual coding algorithms behind DU (Fannie Mae) and LPA (Freddie Mac) are proprietary and distinct. 

Since they interpret "risk layering" differently, a borrower with multiple large, open non-medical collections might occasionally get an automated "Approve/Eligible" from the first, but get flagged as a "Caution" (requiring manual underwriting) by the second. 

VA Mortgages and Non-Medical Collections 

VA Pamphlet 26-7 [Chapter 4, Topic 7] does not mandate the payoff of isolated non-medical collections. 

Unlike FHA loans, the VA does not use an automated mathematical trigger (like the 5% rule) to add a hypothetical monthly debt to your DTI ratio for unpaid collections. 

If no formal payment plan exists, the outstanding balance is completely excluded from your DTI ratio.

Instead, the underwriter performs a qualitative analysis of your credit history. If your credit report shows a pattern of "numerous unpaid collections," the VA views this as an unacceptable credit risk. 

In these severe scenarios, the underwriter may require you to pay off the balances and prove a minimum of 12 months of timely, re-established payment history on new obligations to qualify.

What if Collection Accounts Stem From a Previous Mortgage?

A collection account resulting from a previous mortgage is highly scrutinized. It signals a prior default on the exact asset class you are attempting to finance again.

A collection tied to a prior home loan — a deficiency balance after a short sale, a charged-off second mortgage, an old HOA or property-tax bill from a house you no longer own — gets folded into two separate reviews: the collections rules above, and a program's waiting-period rules for a prior housing event.

FHA Mortgages and Mortgage-Related Collections

FHA treats previous mortgage deficiencies based on the original loan type. 

If your prior defaulted mortgage was an FHA loan, the resulting deficiency is classified as "delinquent federal non-tax debt." 

Your FHA lender runs your Social Security number through HUD's Credit Alert Verification Reporting System (CAIVRS). 

As Per HUD's own CAIVRS reference guide, you're ineligible for FHA financing if CAIVRS shows you're currently delinquent on a federal debt, or if you had an FHA insurance claim paid within the previous three years on a loan made or insured by HUD on your behalf. 

You need to resolve this debt in full before you can get approved for another FHA mortgage. 

If your prior mortgage ended in foreclosure or a deed-in-lieu of foreclosure, HUD 4000.1's standard waiting period is three years from the date ownership transferred out of your name, with a possible reduction to as little as 12 months for documented extenuating circumstances beyond your control (job loss, medical emergency) under the extenuating-circumstances. 

A resulting collection balance under $2,000 aggregate still doesn't force a payoff — but the foreclosure timeline is the bigger hurdle in this scenario.

Regardless of whether your previous mortgage was an FHA or conventional loan, FHA guidelines enforce a standard 3-year waiting period from the completion date of the foreclosure or short sale.

Also, an unpaid deficiency collection balance left over from a past conventional mortgage does not automatically force a payoff; it is treated under FHA’s standard non-medical collection rules, triggering the 5% DTI capacity analysis only if your cumulative non-medical balances exceed $2,000.

Conventional Mortgages and Mortgage-Related Collections 

Fannie Mae enforces strict waiting periods for housing-related derogatory events. 

Fannie Mae treats a mortgage-related collection two ways depending on what actually happened (whether the collection represents an open, active housing debt or if it has been fully absorbed by an official property liquidation event).

A charged-off mortgage account, a completed foreclosure, a deed-in-lieu, or a short sale each trigger a "significant derogatory credit event" waiting period under Section B3-5.3-07: 

• Seven years from the completion date for a full foreclosure (reducible to three years with documented extenuating circumstances plus a 10% down payment, on a primary-residence purchase or rate/term refinance only), and 

• Four years for a deed-in-lieu, short sale, or mortgage charge-off (reducible to two years with extenuating circumstances). 

However, if the old mortgage debt was simply sold to a collector as an unsecured deficiency without a formal foreclosure record on file, it is evaluated under ordinary non-mortgage collection rules instead. This means that on a 1-unit primary residence, the payoff is fully waived by DU regardless of the balance. 

A past housing default severely degrades your credit profile within the Desktop Underwriter system (resulting in a DU "Refer with Caution" finding), often triggering a manual downgrade.

VA Mortgages and Mortgage-Related Collections 

If your previous mortgage was VA-guaranteed and resulted in a loss to the government via foreclosure or short sale, you will owe a debt directly to the government. 

You must contact the VA Debt Management Center to arrange repayment; your full VA loan entitlement cannot be restored, and your CAIVRS database flag will not clear, until that debt is satisfied or structured into an approved repayment agreement.

For previous conventional (non-VA) mortgages that ended in foreclosure or a short sale, the VA enforces a strict 2-year waiting period from the final transfer date. Any remaining deficiency collection balance from that foreclosure does not automatically require a payoff unless it becomes a court judgment. 

However, if the prior conventional mortgage note went into collections without an actual foreclosure or short sale occurring, there is no rigid multi-year clock. Instead, the underwriter will review CAIVRS and require you to show at least 12 months of clean, timely re-established credit on all current obligations to prove financial stability.

Mortgage-Related Collections Escalated Into a Court-Ordered Judgment or Tax Lien?

This is where the stakes go up. 

When a creditor successfully sues you for an unpaid housing deficiency, the collection transforms into a court-ordered judgment. 

If the government pursues unpaid taxes, they issue a tax lien. Both become public records and attach directly to your property. This makes them lethal to a mortgage application.

Once a creditor sues and wins, or the IRS files a lien, "optional" becomes "mandatory" on every program — with one shared workaround: a documented, seasoned repayment plan.

FHA Mortgages and Collections Escalated Into Public Records

FHA guidelines are rigid regarding public records; judgments must generally be paid in full before your loan closes. 

However, an exception exists: you can qualify with an active judgment if you have a formal repayment agreement and document at least 3 months of timely, naturally seasoned payments (no prepayments allowed).

In this case,  the lender can leave the judgment unpaid and simply count the monthly payment in your DTI

Tax liens get a near-identical carve-out [Section II.A.1.b.ii], with one added condition: the taxing authority (the IRS, for a federal lien) must agree in writing to subordinate its lien to the new FHA-insured mortgage, so the mortgage holds first lien position. 

Per HUD Handbook 4000.1 [Section II.A.4.b.iv(O) and II.A.5.a.iv(O)], tax liens get a near-identical carve-out with one added condition: the taxing authority must agree in writing to subordinate its lien to the new FHA-insured mortgage so the bank holds the first lien position. 

Lenders must independently check public records to confirm you are free from unresolved federal delinquencies, separate from standard CAIVRS checks.

Conventional Mortgages and Collections Escalated Into Public Records

Fannie Mae is stricter here than FHA. It views legal claims as a threat to their lien position. 

Per B3-6-07 delinquent credit (including judgments, tax liens, and mechanic's or materialmen's liens that affect Fannie Mae's lien position or diminish your equity) must be paid off at or prior to closing, full stop. 

There's no three-months-of-payments exception for a judgment the way FHA allows. 

The one flexibility Fannie Mae offers is for delinquent federal income tax under an IRS-approved installment agreement; per B3-6-05 , the monthly installment payment can be counted in your DTI instead of requiring full payoff — but only if there's no indication a Notice of Federal Tax Lien has actually been recorded against you in the county where the property sits.

Once a lien is recorded, Fannie Mae requires it paid in full before closing, since there's no subordination path on the conventional side the way there is with FHA. 

Freddie Mac's manual-underwriting guidance in Guide Sections 5202.5 and 5401.2 requires a comparable payoff-or-satisfy standard for judgments and liens; confirm specifics with your lender, since Freddie Mac has historically been less flexible than Fannie Mae on open IRS installment agreements.

VA Mortgages and Collections Escalated Into Public Records

Per VA Pamphlet 26-7 [Chapter 4, Topic 7], court-ordered judgments, delinquent federal non-tax debts, and tax liens must be paid in full or covered by a valid, written repayment agreement to qualify for a mortgage.

Unlike FHA's automated guidelines, the raw VA handbook does not mandate a minimum 3-month payment seasoning rule—granting the underwriter ultimate discretion to evaluate the agreement holistically. 

However, most national mortgage institutions enforce a strict lender overlay requiring 12 months of documented, timely payment history to prove the debt is stable. 

Once approved, the monthly installment amount will be deducted directly from your available DTI and your required VA residual income calculations.

To optimize your credit for an FHA loan within your 6-month window, you must target collections strategically. Missteps can inadvertently lower your credit score or delay your approval.

FHA Mortgage: Which Collections to Get Rid Of

You will need a strategy to get rid of collection accounts before you apply for an FHA mortgage. But, be sure not to pay off all collections blindly if you are applying for an FHA mortgage. 

Under FHA guidelines, prioritize collection accounts on your credit report using this sequence: 

#1. Public Records (Judgments and Tax Liens): FHA will deny your loan if these are open without a formal payment history. You must get rid of these by either paying them in full or establishing a 3-month payment history. 

#2. Recent Non-Medical Collections (Under 2 Years Old): Recent collections actively suppress your FICO score. Removing them from your credit report provides the largest score boost needed to hit FHA minimums. 

#3. Non-Medical Collections Crossing the $2,000 Threshold: If your total non-medical collections equal or exceed $2,000, FHA forces lenders to add 5% of that balance to your monthly debts. So, target specific accounts to bring your cumulative non-medical balance below $2,000.

#4. Medical Collections and Old Collections (Over 5 Years Old): FHA completely ignores medical debts. Old non-medical debts have already done their damage; paying them off without deleting them will not raise your score and could actually lower it by resetting the account activity date.  

Step-by-Step Guide to Get Rid of Collections for an FHA Mortgage 

If your timeline is around 6 months, follow these steps to ensure the changes reflect on your credit report before you apply for an FHA mortgage: 

Step 1: Request Debt Verification

Before talking about money, force the collection agency to prove they legally own the debt and that the amount is accurate. 

• Send a certified Debt Validation Letter to the collection agency.

• By law, they must provide the original contract or billing statements. If they cannot prove it within 30 days, they must remove it from your credit report.  

Step 2: Execute a "Pay for Delete" Agreement

For the accounts you must clear, your goal is complete removal from your credit report, not just a status update to "Paid." A status of "Paid Collection" still counts against your cumulative $2,000 FHA threshold and does not fix your score.  

• Call or write the collector and offer a settlement (start at 30% to 50% of the total debt).

• Explicitly state that you will pay only if they agree in writing to completely delete the collection account from all three credit bureaus (Equifax, Experian, TransUnion). 

• Never pay a dime until you receive the "Pay for Delete" agreement in writing via email or mail. Verbal promises are completely unenforceable.