Can you get an FHA loan approved with collections on credit report?
I want to buy a house using an FHA loan. My credit shows loan payments for the past two years have been current and on time. However, while attending college, I had two judgements placed against me.
Chapter 13 was not an option because I was told I would not be able to continue to receive the student loans needed to complete my education. I satisfied one judgment and I am in the process of making a debt settlement agreement with the second one.
My credit score is 652 most likely due to the unsatisfied judgement. I have been at my current job for two years in May of this year. That is when I would like to start looking.
I have no credit cards. Should I apply for one before shopping for a mortgage or wait. I did not want my score to be dinged due to a credit inquiry?
Will be able to get an FHA loan?
—Chris
Short answer
Yes, but unresolved collection accounts work against you, and an unpaid judgment is the biggest obstacle of all. If you are settling a judgment, make sure the court record is updated to show it satisfied before you apply.
Key points on this page
- When a judgment is the remaining item, the court record has to show it as satisfied. Check that any judgment you already settled shows that way on your credit reports too.
- Aim for a debt to income ratio under 43 percent. Legitimate outstanding collection accounts skew that ratio and work against you. Some banks approve above 43 percent depending on your assets and other factors.
- FHA credit score requirements are about as forgiving as you will find. Under 500 will not qualify. Between 500 and 579 can mean a 90 percent loan to value limit. 580 or higher is a good baseline floor for most borrowers.
- Even with a healthy debt to income ratio, a loan officer may point to collection items as what is holding approval back, and that is more likely with an unpaid judgment.
- Opening new credit cards for the sake of credit diversity is unlikely to improve your odds, and new inquiries and accounts can lower your score slightly for a few months.
- Find a mortgage lender or loan officer you like and start the conversation a few months before you plan to apply.
Because your last collection account on your credit report is a judgment, you will want to be sure the court record gets updated that the account has been resolved. Does the other judgment you settled no show as satisfied on your credit reports?
Getting an FHA Loan with Collections on Your Credit Report
The home loan markets have changed in recent years. The housing boom bust and record foreclosures created an environment that tightened mortgage lending. And as of January 2014, most home buyers will want to be sure they meet the CFPB’s new ability to repay rules before you start shopping for a home loan. While this is not so much directed at you, it is good ground to cover for other readers:
1. Calculate your monthly income and expenses. Include all of your normal recurring bills (rent, car loan, credit cards, student loans, utility bills). In order to set yourself up for the best odds of getting approved for the loan, you want to have a DTI (debt to income ratio) of under 43%. This means your normal monthly recurring bills add up to less than 43% of your monthly income. Any legitimate outstanding debt collection accounts that show on your credit report are goingto skew your DTI and work against you.
Some banks will approve a loan if your DTI is higher than 43%, but it will depend on other assets you may have, and other outliers.
2. Credit score requirements from the FHA are about as forgiving as can be found. But the score you need depends on the loan you are applying for. At the time I am answering this, the FHA says you will not qualify with a credit score under 500. Credit scores between 500 and 579 can mean only 90% loan to value loans, and a credit score of 580 or higher is a good baseline floor for most borrowers.
Is 652 your middle credit score?
3. Collections and judgments on your credit report may need to be paid or settled. The debt to income ratio concern is addressed when collection accounts are resolved, but there are instances (more recently than I ever recall), where even if your DTI is well within what is considered healthy, your loan officer will indicate collection items on your credit reports are holding back loan approval. And this is certainly more likely with an unpaid judgment on the credit report.
You are settling the remaining judgment now, so be sure the court record is updated to show the judgment is satisfied before May.
How much credit diversity do you need for a mortgage loan?
I went into the above details so that later readers can get a grip on the issues that you seem to already have. And I am happy you have a realistic time frame and expectations (some people learn of collections on their credit report holding them back only after applying for a loan, and hope to still close in a matter of weeks). Your other question about applying for credit cards is more about diversity of credit.
Having established revolving consumer credit, like credit cards, is a small part of a healthy credit profile. Two such accounts are a normal part of a consumer credit profile, and are said to help enhance your credit scores (with all other credit score health benefits being observed).
Will the FHA loan you are looking at be more likely to be approved if you have more credit diversity with one or more new credit cards established? I do not think so. And you do run the risk of lowering your credit score for a few months as a result of new inquiries and accounts, even if only slightly.
It does not sound like you have connected with a mortgage lender or loan officer yet. I would encourage you to locate one you like and start the dialogue about your loan options in preparation for applying a few months from now. With the newness of the CFPB qualified mortgage rules, and ability to repay measures, there may be some minor things your lender/loan officer can help you get a head start on.
Anyone trying to resolve collection accounts on your credit reports in order to achieve credit goals, like a new home loan, is welcome to post about your situation in the comments below for feedback.
About Michael BoveeMichael started CRN in 2004 with a mission to provide people in need with detailed debt and credit help and education. Michael has participated as an expert panelist in federal consumer protection rule making, collaborated on state law changes governing debt consolidation, has worked as an expert witness in court matters related to the debt relief industry. He is available to speak with you about your financial struggle and helps people resolve their debt problems daily.
My husband and i have put a contract in for a home loan. The loan officer sent it to audit and said it passed with flying colors. My score is 621 and husbands middle score is 655. I have a collections on my credit report from 2013 when i was overpaid for veterans widows benefits. I was set up to pay monthly payments but my mother has been sick forcthe last 2 years and passed away August 2016. We had been taking care of her and she lived with us. Do we have a chance on getting the loan? Our debts tgru crefit cards combined are about !7600. Plus the $4100 owed to veterans.
Also i have not made any payments to veterans for over 2 yrs. But i get social security and they take out money each year fir the va collection. The IRS treasury gets the money.
The money the IRS intercepts from your tax refund is not typically the payment plan you need to clear mortgage underwriting.
You will likely find you need to pay the VA back, or have payments set up with several months of good standing before the loan is approved.
Are those credit cards all current?
Hi there,
I have 4 accounts in collections equaling to about 9000$. One was a personal loan, the others are credit cards. They just were sold to collections this month. I also have 400 in collections of medical debt.
I don’t make enough money to pay them, and my significant other lost his job and can’t find any steady employment so I don’t know what to do. We’re living off one income.
I eventually want to buy a house. But my credit is low. At 550. I know I can’t get a loan in my current position. I don’t plan to until a years down the road.
I am considering bankruptcy because I don’t make enough to pay my collections accounts after all my other bills, I only make 1400 a month. My car will be paid off in a year and a half. And that’ll free up 300 a month. I am scared to wait that long to pay in case I do get judgements.
What would be a quickest way to build my credit up to prepare me to buy a house in the next 3-5 years?
Thank you
You only need 2 years separation from a chapter 7 to qualify for FHA financing. Without digging deep into your personal financials, I would say chapter 7 would be the least cost, and quickest path to home ownership. The money you save can be used as a down payment 2 or 3 years from now. Be sure to work toward getting your middle credit score to 620 with no unresolved debts before applying.
I have to cable bills that I’m disputing because I know that they are overcharging me will that stop me from getting a home loan FHA I have a disabled son and disabled brother also I have no credit also good or bad know that I’ve been living in the same place for two and a half years
What are the amounts of the bills?
When are you trying to get the home loan?
What is your current FICO score?
What has your loan officer or broker told you to expect given the situation?
Hello I have a collection account on my credit report have an arrangement of monthly payments . I have tried 2 times to settle with them they won’t.so I continue to make the payment my credit scores are 730 and 680 my problem is now my husband wants to get a 2nd home how can I resolve this? Should I just pay the full amount owed and move on?
Who is the creditor or debt collector you are dealing with?
The company is profolio recovery. One year ago gave me an amount called to pay them 2 days later another person gave me a different amount keep saying daily payments change? Can’t get a complete answer from no one.
File a complaint with the CFPB about Portfolio Recovery Associates changing the balance owed with each phone call. They will get the right amount figured out and let you know pretty quick after that.
So I be been approved for a mortgage (rural development program) they pulled my credit said everything looks good. Found a house and offer is accepted. I’ve sent over all the documents (bank statements, pay stubs, tax returns etc). We close on December 15th. Just the other day after they pulled my report, and collection account popped up for $403. Will they pull my report before or on closing? I’m just curious what I should to make sure the loan is not denied.
Check with your loan officer.
Is the debt legitimate? Has it been 7 or more years since you stopped paying? Who is it that suddenly started reporting it?
Hi, How did your situation work out for you? I’m in the same boat as you. Where you able to close on your home?
I have one two late payment on a car loan and had a old car on there have 4 credit cards score don’t go up that much trying for a year now want to buy a house soon what should I do thanks
What are your current credit scores?
Hello Mike,
Im seeking advice with steps needed/chances of getting approved for a house (first time home buyer program).
I have decent credit around 680-740 between all 3 bureaus, never a missed payment or anything. But my wife has 5 unpaid collections opened totaling $7,000(medicals, appartment complex and light bill) credit scores ranging from 540-640.
Since my credit is decent, would i have to pay her collections before applying? If so would a payment plan to the collection agentcy be good enough or would the bank lender require paid in full?
Lasty, i currently have both cars in my name, which is damaging my credit/income ratio, will this hurt me when applying for the loan? Since with the home loan i would beable to then add her income, or do they look at it as an individual stand points and i need to get one of the cars transfered over to her name or another family members name?
I just got my wife a secured card to start repairing her credit, would like to purchase a house around march-april if possible.
Thanks for taking the time out to read this.
If you are both applying for the loan, and it sounds like you should in order to include her income, I would want to settle her unpaid collections, rather than engage in a payment plan (though payment plans are sometimes sufficient with FHA loans).
How old are the collections?
Hello, the dates are as following,
Sep 6, 2011 – from apartments
Jul 13, 2012 – electric
May 8, 2011 – hospital
Jul 24, 2015 – hospital
Apr 6, 2015 – hospital
Thanks. The earliest to age off is in 2018, so I would be negotiating and settling. I would focus on non medical debt first, so that those updates to the credit report season more. Paid medical is not factored into credit scoring like it once was, so resolving those will often have a more immediate impact.
Hi Michael, my husband and i recently had to file bankruptcy. One of the acvounts that went into bankruptcy was a capitol one account that i co-signed on for my son years ago. This went into the bankruptcy by mistake and now shows up on his credit report as a collections. Amount is only $986 and the collections agency won’t let us settle because it was iincluded in the bankruptcy. Question is, now that it is on my son’s credit report is he going to be able to get approved for a mortgage? Help! Thanks.
Was this a situation where your son was an authorized user on your card, or it was his card and yours equally?
It will get in the way of a home loan these days. If is the co-borrower on the account he should be able to resolve the collection account with Capital One. He will want to escalate his issue up the ladder. Let me know if he runs into trouble.
Is he trying for a mortgage right now, or in the next few months?
I am in the middle of obtaining a loan for a home purchase via FHA. Middle score of 597 with a low DTI ratio because of late payments in the past. Since obtaining new employment in May and making payments steadily since, it has been improving. My question is, a new collection just popped up onto my credit report for a Verizon $411. Should I quickly pay this off and obtain proof because I’m sure they pull another credit report for signing date. I do have 3 other small items in collections from before. 2 being medical and 1 being a disputed Time Warner bill that was previously paid with an arrangement before an installation date with them at an old residence but I am having trouble obtaining proof from them through phone calls and stopping in to office. I assume that the collection is more important than paying down a credit card for an improved DTI ration? This is killing me with all the hoops because I wasn’t prepared for this so quickly, but my life’s circumstances became dangerous in my current living arrangements. So it is imperative that I make the best choice for the best possible outcome. Thank you. Advice is appreciated.
I would resolve the collection first if it were me.
So I called and they said they don’t report to credit agencies. I actually just got call that I’ve gotten approved. But don’t want any other reports pulled last minute to possibly hurt me.
Thank you
It is known that you would pay down your revolving open accounts first ( credit card). In fact unless the lender ask you to pay off a collection account you shouldn’t even touch them. It is very possible to get a loan with collections. Each lender has their own standards in conjunction with the FHA guidelines. If your credit score is at 580 and your DTI looks good and you don’t have any federal financial obligations your good. Check around an skilled loan officer would be able to let you know where you stand. Thats the point of the pre approval process. As long as things don’t change from pre approval to close you should be fine.
FHA typically wants unpaid collections in excess of 2k resolved.
I want to start the process in November to buy a home my score is in the high 600’s but i have a 200 medical collection do that have to be paid
You may be able to still get the loan approved with a single collection account that low. If it were me, and the debt is legitimate, I would pay it.
I have a similar situation: Medical bill that just went on my credit for about $230 from a car accident. I believe it is legitimate. My question is if I pay it can I then go and dispute it because I never received a bill from them? Will I have a success? Just about to apply for a home loan and I am worried about how this just dropped my score 60 points from a Fico score of 740. We keep low balances on credit cards, pay on time and have a new car loan we got June 2016.
Also curious if pay-to-remove really works? I have been researching and it seems like it goes both ways. Might be successful if it’s a small collection agency and if you get it in writing? Any insight would be greatly appreciated! Thank you
The pay for delete situations I see succeed tend to be utility bills in collection and small one off medical bills. It is worth a shot, but also know that paid medical collection accounts on your credit reports are no longer given much weight. If you resolve the collection account and do not get them to take it off your credit reports, your loan will likely still succeed.
I’ve been working on my credit for a year now. Starting middle score was 505 FICO. It is now 582. I would like to buy a house next year around summer 2017. I have 1 judgement which i pay monthly on (PRA) and will be paid off in Feb 2017. I have 4 accounts in collections that i need to settle. (3 with PRA and 1 with LVNV funding) Date of last activity is around Sept of 2012 on all accounts. They have been in collections since roughly 2014. Total of collections is $2600. My goal is to get my credit score up to a 620-650 range. I have a secured credit card that i’ve been paying on 6 months now and keep the balance at or below 25%. I just applied for a credit builder loan for $1000 (12 month), first payment is 10/7. And i have student loans that have been current for 16 months. I have a few questions. Should i pay/settle the collection accounts? How long does the negotiations take? Will the collection accounts affect my changes of getting approved for a FHA loan?
You are going to want to resolve the unpaid collection accounts before going for the loan. I would prefer to have that done 6 to 12 months prior to my loan application. You will get the same credit benefit from settling for less as you will paying in full, so I would save money where possible.
Negotiations can happen over one call, or can take many. It will vary. But sometimes you have to grind a debt collector down to get to something you can afford.
You can still get the loan through if you are making payments on the judgment consistently, but I would try to pay that off quicker too.
Last October I decided to give Lexington Law a try. They disputed a medical bill for validation. It is still in “reinvestigation”. I wrote a letter and filled out a dispute form to mail in to Equifax because the collection agency is reporting the same thing twice on my credit report. Same dates, same amount, same original creditor, only differences are one account number has an added 0 and one says “reinvestigation in progress”. I got the results from my mailed in dispute today. The only thing they did was update my name to include my middle initial. They didn’t investigate anything or address my dispute or concerns. What should I do now?
Can you be clearer on what you are disputing and why? Are you only disputing the duplicate entry, and was one removed? Are you disputing the validity of the debt, and if so, why?
Yes I disputed the validity of the debt because I had a few other items that weren’t mine so I wanted to be sure this is mine. I never received notice this was going to collections or in collections. It is a medical debt. The duplicate was not deleted. Equifax rep said I requested my name be updated which I did not. I disputed the duplicate account and since the collection agency didn’t respond, disputed validity with Equifax. She just said “oh I apologize. Lets start a dispute now”. So they are giving another 30 days and I probably still won’t get anywhere. I have copies of my dispute letter and it was sent certified mail return receipt requested.
I would consider filing a credit reporting complaint with the CFPB. I might have done that before the second dispute, but now that you have sent the second one, you may want to wait to see the outcome.
My husband and I have already been pre-approved to buy a home. Although at the time I was given the pre-approval papers signed and everything, the lender states they needed something stating the 2 charge off accounts were taken care of. Does this mean I can create a document myself staying these accounts are paid/satisfied? Like I said we have already received the pre-approval letters, just need to know if you think a document from myself stating these accounts have been taken care of can they not approve us now?
Were those debts judgments or just collection accounts on your credit reports? Did you settle or pay them off, and if so when? Did you get documentation from the creditors or debt collectors?
btw it’s an FHA loan..
You can get an FHA loan through with a 580 credit score, but not all lenders will do them.
My husband was pre-qualified for a loan with a middle score of 646. A collection that was reported on 2 of the 3 credit bureaus is now being reported on all 3 & caused his middle score to drop to 519. Now his low score is his middle score (526). He has since paid the collection & they’re not removing it but going to report it as paid. Do you think we will still be able to close once the lender pulls his credit right before closing?
You usually need a 620 to get an FHA loan through most lenders. When is the estimated closing date?
Sept 30th
You could look for it to update by then, but also be proactive by utilizing your credit reporting dispute options.
Ok, Will disputing the debt affect the loan. I know the lender has the ability to see what disputes have been made & the results.
Talking to the lender first may be a good idea. But if the account is resolved; is not showing the updated status; and you dispute it to show paid, you would not be looking at the same scenario as when we send in disputes on unresolved accounts that end up staying on the report while an extra notation shows it is disputed by consumer. The latter is the type that lenders often want resolved before underwriting approves a loan.
ok.. Thanks
I just found out while trying to buy a condo that my Experian report says I’m dead, because it had someone else’s info, such as a closed account from USAA, Midstar…not sure what that is..But I’m alive and have never been in military or had an account with whoever they are. The other two credit bureaus have none of that info and on one in at 680 the other one at 679. I don’t have 30 days to dispute. I don’t want to lose my chance at a good deal. Any advice would be greatly appreciated.
Hi, i am almost getting ready to close on a new home but theres some issues with unpaid credit cards to proceed. Both of the credit cards collection agencies have gone bankrupt. What is the fastest way to find out how much is owed and who is in charge of the collection debt so i wont loose our on getting the house??
Who are the collection agencies you are dealing with? When did you last make payments on the accounts? Did either account end up in court for collection?
Call in for a consult if you like. I can get to the bottom of the issues and provide quicker feedback. You can reach me at 800-939-8357, ext 2, or fill in the talk to Michael form in the right sidebar.
Hi. Trying to buy a house but an old debt came up for $737. I immediately paid it but now waiting for an update from Transunion. They wouldn’t send a receipt. How long should I wait to call lender? Paid on July 12, 2016. Thanks.
Who is it that you paid? Did you have a payoff letter, or anything like that?
Hi. I paid and and no, no payout letter. Just got on the phone and paid it directly with my checking account to collection agency. Still today, lender called and said it does not show as paid with transunion although funds were taken out of my account. Called transunion and they said they could not give a receipt. Called Amazon and they said they could not give me any information as it was in collections. Don’t know what to do. Someone should have to provide a receipt or am I wrong? Thanks.
As shocking as this sounds, in most situations there is no requirement to provide a receipt in the way you are thinking. You would need to request that prior to payment, or be in a situation where they have to send one, or are known to.
I would file a dispute with the credit report agencies. Read through this guide about credit report disputes.
If your loan officer or mortgage broker is experienced, see if they can do a rapid rescore.
Thanks so much for your help. I may have to file a dispute. Do you know roughly how long it will take? Time is precious…
Read through that linked article. Results can occur within a matter of days up to 30.
Thanks. I’ll just wait. Can’t wait another 30 days. My 30 days are up on 8/12
That does not make sense to me. I would be as proactive as I could. You can indeed have a direct impact on how quickly they respond to this. Filing your dispute with a credit bureau along with proof you paid can get wrapped up in a day or 3. And your loan officer can have a direct impact through rapid rescore.
Waiting would not be an option for me if I wanted this.
I have disputed it. I will keep you updated. Thanks for your help.
Hello Michael,
I have five collections accounts on my report, and a reported 7 late payments. One of those collections accounts are paid in full, and that covers a few of the late payments also. They won’t remove it for about another five years. I have no judgements. I have student loans of 48,000.00 that just went into repayment this month. I have two credit cards that I have been making monthly payments on. My score is about 580 right now. I plan on applying for a mortgage around December or January. I also have an account in he checked systems that I am making monthly payments on. That will be paid off in December. By then I will be making about 2,000 a month before taxes. I should also have a couple grand in a savings account for the closing costs. What chances do you think I have to get approved?
Post an outline of all of the collection accounts, and whether there are still balances owed, and when you last paid anything on them.
My husband and I just got a preapproval for a FHA loan but it hasn’t went to underwriting yet. We have in dispute notations on our credit report. Will these notations keep stop us from closing on our home?
Who are the disputes about? Who are the banks or collection agencies you disputed with?
Disputed items can hold up a home loan.
Hi Micheal. My husband and myself were preapproved for fha loan. We had some dispute remarks on our credit report and the collection agency, phoenix recovery group, offered a settlement. I have in writing their agreement to list the account as settlement paid in full and remove all dispute remarks once payment clears. My question is will doing this settlement cause our score to drop? The settlement is for an old apartment broken lease. Thanks
If it is removed it can no longer factor into your score, so it won’t matter.
If it stays on there, but shows resolved, your FHA loan can still go through. You can still get an FHA loan with a 620. You can actually have a lower score than that in some situations.