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.
I would like to apply for mortgage;
FICO scores:
768 Experian FICO SCORE 2
754 Equifax FICO SCORE 5
684 Transunion FICO SCORE 4
My concern is that on the Transunion report ONLY, there is a collections for a timeshare ($7000) from 2015. Does it matter that it is only reported on one credit bureau; my understanding is that lenders look at middle score…I would also need to get that middle score to 760 to get the best rates…I am a few months out from actually applying for loan as I only have $3000 saved to date.
Would I be considered for a mortgage conventional or FHA with the collection on one report?
FHA typically wants any collection resolved over 2k. \
They will all see it and question it.
You may want to try to resolve it before hand.
I am hoping to use a VA Home Loan purchase a home around April or May of 2021. However, I have 2 open collections on my account. Current credit score is 587, and I’m certain it will be back to above 620 by my hoped for purchase date. Will those 2 collections hold me back from purchasing?
If the collections are unpaid, I would tackle them before applying. If they are paid collections, you are good to go when your credit score improves.
Do collections Matter when they are added to your credit report as long as they are completely paid off before applying for the mortgage?
Talk to your loan officer.
I see many mortgage loans go through with paid, or resolved collection accounts on the credit report.
The father of my kids and I are planning on trying to buy a home in the beginning of next year. My fico score is pretty low, 543. Transunion and Equifax around the same 545. My boyfriends is 605. We are going to pay off collections in the beginning of next year when taxes go out, because we just don’t have the extra cash right now. We have paid rent late 2 times this year, and our utility bill is up to date. We have assets for down payment and closing costs. We also have a family member willing to be a co-signer. We have both worked for the same company. He’s worked there for 9 years, I’ve been there for 5 years. We make about 6,000 monthly together after taxes. Do you think we would be approved for an FHA loan? Will the co-signer be a big help in getting approved?
I also wanted to add we will be applying together. Does credit age matter? His credit goes back 6 years and a few months. I have a car payment I’ve been paying on, for 4 months now, by the time we go to apply I will have at least 8 months paying on the car. We both have 100% on time payments with what’s linked to our credit.
The FHA loan will be the route to go if your scores are not 640, and perhaps even if they are.
I would take care of any unpaid collections as you are able. That will help you get approved, and could help your scores quickly enough, but the co-signer will help if your scores do not improve enough.
Happy house shopping!
Thanks for your feedback! You gave us more hope!
Hello,
I am wanting to purchase a home. I make very good living but my credit took a hot due to late payments last year while caring for a sick parent. She has since passed on and I have worked hard to recover. FICO 8 is mid 600’s but 5,4,2 are mid 500’s to low 600’s I also have 3 chargoffs (two paid by me] 1 outstanding I refuse to pay and is being worked on by Lexington law. With all that going on could I still qualify for a hone loan?
Thanks
I do not think so Gene.
What is the deal with the one you refuse to settle?
I have one collections from 2015. Portfolio recovery associates bought it. I have been paying 50.00 a month. on time. my balance is 1935. my FICO is 680. spoke with loan officer at Caliber Home Loans. This is the only one negative on my credit. IM told i cannot get a FHA loan unless i pay it off. He first told me if its under 2000,00 i would be ok so long as i was paying it on tiime. I recently recieved a call teling me i cant get the loan unless i pay it off. He had me do a conference call with Corelogic Credco and Portfolio Recover Assoc. PRA told them i was a month ahead in payments and i have been paying on time. Why cant I get a FHA loan? My debt total debt is aprrox 3400.00
Can you come up with money to pay this off?
I tried settling and they refused . Since this post my credit score has gone up 57 points. I am at 742..
I met with a realtor yesterday and told him my fico was 642 and he told me to get pre approved for a mortgage. I’ve been working with a credit repair company and she’s got many things deleted off my credit. Except one apartment bill of 7k. Will I be able to qualify? Or should I just let my husband get it on his own?
I doubt you will get approved with an unpaid collection like that.
Also be careful and look for any other unpaid collections that are less than 7 years old to pop back on your reports. That can happen sometimes with credit repair companies.
I want to buy a house. I have paid all of my credit cards down to 10-20% utilization. My total credit card debt is less than $1000. I have 10 collections that total about 3500, majority are medical. My FICO is 616 ,my credit score is 591, and I’m sure they will go up as soon as my credit report reflects the credit cards I recently paid down. I have$ 4000 saved .Do I have to pay the collections off before I start trying to get pre-approved ? I don’t want to hurt my credit score by getting a hard inquiry when trying to get pre-approved if I need to tackle the collection debt first? Also what is my first step in trying to buy a house?
FHA often has a hard stop on loan approval if your unpaid collections exceed 2k. You will want to address these first. I would try to settle for less wherever you can, though it can be tougher on medical bills.
I would talk with a loan officer about hoe to prepare for applying for the loan, but not let them do the hard pull yet.
I had several Collections on my Credit reports due to the failing economy, and the eventual loss of my employment after 23 years in 2009. In order to keep my home and my car, I chose not to pay on credit cards. Several of those credit cards were charged off eventually bought by debt collectors.
The statue of limitations has passed on all of these credit cards. Most of the credit cards and or collections have fallen off of my credit report as of January 2017, except 2. Two accounts are owned by the same debt collector. The accounts are no longer in the collection side of my credit karma report, but now they’re repairing under loans. What is this? How is this? The statue of limitation has clearly passed, and in another 4 months they should fall off my credit report all together, however, this debt collector seems to have reaged these two accounts. Is that possible? I have never made a payment to this collection agency, I have never had communication with a collection agency. I have ignored the many attempts at settlement offers, simply because I was not in a position to pay anything on them and as time went by thr closer to the statue of limitations came.
So, my question is. Can this collection agency reage the 2 accounts? Or does it still go by the original delinquency date of the original creditor?
It should go by the original delinquency. That does not stop errors from happening, whether by accident or design.
If it were me I would wait the 4 months, and if they don’t drop off, I would send credit bureau disputes to get them removed.
I am currently in the mortgage process. I applied for a fha loan. I had to pay a debt that I had that was non medical I settled the debt for $2000. My middle score is at 627. The collection is 5 years old will this make my credit score go down? I paid on it last month. If it will make my score go down how long will it take to update on my credit report?
Hard to guess at what your credit score is going to do, but you can get an FHA loan through with a 580 credit score. Most major banks that do FHA loans want to see a 620.
Ask your loan officer if they can do a rapid rescore for credit report update speed. Otherwise I see credit reports update within 4 to 6 weeks after you resolve old collections.
I want to apply for a VA loan of FHA loan (first time home buyer) and I have no idea if it is even possible for me to qualify. I am a single mom and relocated to more affordable area a couple years back to pay down debt and give my kids a better life, but I feel this stupid credit score is holding me back.
I am extremely discouraged at this point and wanted to know if it is even worth the effort to proceed at this time with a home loan. My goal is to buy a home around the end of this summer. My current FICO is 586, with the last 2 years of payments on all accounts on time. I do have some relatively old medical debt in collections that is not only being charged interest almost weekly, but is also being reported inaccurately (I had medical insurance and it was not billed properly so I refuse to pay this amount). One is reported opened in May 2013, with a current balance of $2,738 (original $2,000) and another reported June 2011 from the same company with a balance of $78 (original $50), Another from the same stinking company reported May 2011 for $1,200.
I have tried repeatedly to get them correctly reported and / or removed through the collection agencies and credit bureaus, all to no avail. They are the ONLY collections accounts I have on file, but my FICO is currently only 586 because of them (I think). I do not know what to do in regards to raising my score.. All of my other accounts have been on time for at least the past 2-3 years. Do I have a shot of qualifying for a loan with this on my report? All other accounts are in good standing and DTI ratio is 29% including all monthly minimum payments.
P.S. I have read that medical debt is no longer being counted in home loan qualifications as of 2016 but I wanted to find out how that affects my chances in relation to my low FICO score.
Technically, FHA loans can go through with a 580, but 60 is the norm.
I would connect with a bank or local broker that does FHA/VA and get started working with them to put yourself in the best position by summer.
If those credit bureau entries are truly incorrect in some way that is not being fixed I would consider filing a credit reporting complaint with the CFPB too.
I am wanting to try for an FHA loan, but I want to make sure my credit is where it needs to be before I do. My lowest score is 530, and my highest is 583. I have many doctor bills, and one unpaid fingerhut account. I am paying off the fingerhut account, but I do not know what to pay off on the doctor bills to raise my credit. I know I really need to be around 640 to get the loan easier than a lower score. What should I pay off on my credit to raise my score? And what will the lenders look for when I apply for the loan?
How old are the debts?
Do you have any positive items showing on your credit reports?
How many different medical debts are showing on your credit? What are the balances?
The fingerhut is a little over two years old, the medical bills range from one to 3 years old. I have a car loan in good standing, and two credit accounts in good standing with zero balance. I believe my total medical debt is around 10,000 which I need to pay down, I just dont know where to start.
I would start with the smallest medical debt and work my way up. I would be looking to settle them for less where ever possible. Check out this post about settling medical debts, and be sure to watch the video in that article.
Hi, my husband has a collection account from HSBC loan taken out in 2009 that was sold multiple times it is now$11,000. He has a median score of 660. Everything else is good. Is there any way we can approve for a home loan?
You will want to resolve the unpaid credit card by settling it for less and updating to the credit report as paid. That, or let it age off after 7 years from when you stopped paying. When did he stop paying HSBC?
Hi Michael,
I am in the process of trying to purchase a home. I went through a divorce in 2013 and I had 3 credit cards that fell behind. Chase was at $25,000, BOA was at $22,000 and Citicard was at $29,000. Needless to say, my credit score was hit really after this happened.
I finally got the Chase card payed off this past September. The other 2 cards that were charged off in 2013 and I am still trying to pay them off. BOA and Citicard are both showing up as charged off on my credit report.
My BOA card currently has a balance of $13,000 and I have a payment plan set up with them. My Citicard balance is at $9,300. It was sent to a CA in 2013 and I had a payment plan set up with them until Citicard pulled my account back last month. I am still in the process of trying to negotiate something with Citicard. They offered me 3 options:
1- Pay off the account in full and they would update my credit report to say, “paid in full.”
2- Settle for $3,100 and they would update my credit report to say “settled in full.”
3- Pay $310 a month for 30 months and they would update my credit report to say “settled in full.”
My mortgage broker said in order to qualify for an FHA loan, I need to provide proof of a payment arrangement for BOA and Citicard. The person I spoke to from the Citicard Recovery Department said they will NOT provide me with written documentation for payment plan. They will only provide something in writing for the settlement. I have a letter BOA stating I have a payment arrangement set up with them. I don’t think my DTI ratio would be approved if I included the 5% of the Citicard balance, instead of a written payment agreement.
I have $3,100 cash, so I could do the settlement offer. My question to you is, if I do the settlement and they update my credit report, will that make my credit score drop? I have been working hard trying to clean up my credit report and raise my credit score. Right now my FICO score is around 650. I have worked so hard to get the Citicard balance down $9,300. I am afraid if I do the settlement offer my credit score will drop once they update my credit report and I may not have a high enough score to qualify for the 3.5 % down on the FHA loan.
Thank you so much for your advice!
You may only need a 620 credit score to get your loan approved. But settling should not drop your credit score by that much.
And if the whole loan is a no go without the Citibank resolved, you already have your answer… settling gets you where you want to go.
Please do post an update with how this all shakes out. Later readers will benefit from knowing how you progressed 🙂
I called back Citicard today to make the payment of $3300 to settle the account and the representative I spoke said he can’t find anything in the notes about a settlement agreement, so now the settlement offer is no longer an option. Â
He said the only 2 options I have right now is to agree to the payment plan of $300 for 30 months or pay the balance in full. Â I spent an hour on the phone with this guy. Â I even asked to speak to a supervisor, but no luck. Â I asked him if I could get something in writing about the payment plan and he said No. Â He said they would do a 3 way call and verbally tell someone I am on a payment plan with them, but nothing in writing. Â
Do you think verbal acknowledgement of the agreement over the phone and bank statements showing the payments coming out of my checking account would suffice for an FHA loan?
UPDATE: After giving it some thought, I decided to call Citicard back and this time I asked to speak to a supervisor. I told the Supervisor I had a taped conversation from last Thursday about a settlement offer that was made to me, but when I called in earlier today to make the payment, I was told there was not a settlement offer noted on my account. Needless to say, within 10 minutes of our conversation, the Supervisor had offered me another settlement. The new settlement is for $3,250 ($50 less than the one from last week). They are giving me the option to pay it off at once or make payments of $200 until the $3,250 is paid off.
They are sending me a written agreement with all the details of the settlement in the mail, so I should receive it sometime next week.
That made my day!
Way to go Lori! Please update this thread when you know the outcome of your loan.
Will do, thank you!
I am interested in purchasing a home. My credit score recently dropped to 540 due to my student loans going into default. They are now current. I have a car loan with a balance of $3000 and 1 secured credit card. I have 6 collection accounts totaling $2300. I have $5000 in savings. Do I have a chance of getting approved for an FHA loan? Also, should I work with an agency to have these negative items removed from my credit report and will be be better for my report if I paid them off?
Typo: Will it be better if I paid them off, or try to get them removed?
It is better, and more of a sure thing outcome, if you just negotiate a lower lump sum pay off on the unresolved collections. You can get an FHA loan with a 580 credit score and no unresolved collections.
I highly recommend you work with an experienced FHA lender or broker. They can help you get your credit straight and let you know what FHA needs to see.
Thank you so much for the response. I think this is very good advice!
I am interested in purchasing a home soon. I have had a vile tart repossession and currently have 2 accounts in collections. I am planning on laying those off in the next month or two. My credit score is currently at 584. What are my odds of being FHA approved
*Voluntary repossession was 2 years ago the remainder of the account is in collections
FHA loans can get approved with a 580, but the norm is a 620 or higher. I would work with a loan officer or broker with a lot of FHA experience, and still try to get the score up. Sometimes resolving unpaid debts is all it will take, and other times you need 90 days to 6 months after settling old bills.
I have finally paid off all my collections (6), did that all in one year. I now have 2 old debts not in collections gonna pay off in January..only other loans i have is a vehicle loan (6 more payments) and a personal loan…going to apply for a mortgage in March/April…scores are 640s , were lower 540s in January, wish me luck.
Nice! Good luck and post an update with your progress.
Thank you, I def will, going to see about a FHA loan, lower down payment and credit standards.
I recently received a default judgment from the courts for a car loan I co-signed for almost 8 years ago. The original debt does not show up on my credit report. Will this show up when I apply for a mortgage. Fico score is 662. All of my accounts are current and show pays as agreed. What should I do?
The mortgage underwriter is near certain to find any judgment even though it does not show on your credit reports.
If you are going for a mortgage, I would settle the judgment before I try to apply. If you are going for FHA financing, but cannot afford to settle the judgment for a lump sum, you will want to try to negotiate a monthly payment you can afford, and have made several payments on time, before applying.
Mike I have a judgment from Westlake financial from 2014. Westlake has reported its charged off and it shows the account in judgment on my credit report. I’m up for a pre approval but this judgment is my way to be successful. Being that the account is in judgment status can Westlake still report the account is delinquent being that legal parties are involved and its judgment status? I dropped 60 points due to a recent report from Westlake about the account. I’ve contacted the proper party to resolve this judgment but My score is taking the impact of the account.
Yes, judgment debts do get to show on your credit, and can hurt your FICO to a varying degree. You can still get a loan approved with a resolved judgment, just not an unpaid one.
If you are asking whether the original credit reporting can still show up now that there is a judgment, that is also normal. I like to call it double jeopardy. It can get as bad as triple trouble!
But again, resolving the debt will help you reach your goals.
Hi Michael,
I’m in the process of buying a new home build. I prequalified in July 2014 and the builder began to build the home. I pulled my credit in early November and noticed a collection account from Convergent for $890. The lender then pulled the day before I did, and saw that my credit score had dropped more than 60 points. I was told by a realtor to dispute the account becasue it was under $1000 and should not affect getting the approval from FHA. I’m not for sure if this is the best option. I have little time left, as closing is coming up soon, What should I do, the collection agency will not negotiate to remove the tradeline once it’s paid.
Do you recognize the account as your own? When did if become a collection account (when you missed payments)?
According to the report, it’s a Sprint bill fron 2012. I recently checked my credit and they removed it fron Experian and Equifax but not trans union?
If it is your account, and Convergent is confident of its information accuracy, they may not remove it. You can often negotiate a settlement, which would update to a paid collection, and find that FHA will still approve with a 620 FICO.
If you were to dispute it, what would be the basis?