Guideline answers · FHA
FHA · Credit
Do collections and charge-offs have to be paid off on an FHA loan?
Not necessarily. When collection balances total $2,000 or more, the lender either verifies they are paid at or before closing, counts the payment from a documented payment arrangement in DTI, or, if no arrangement is available, counts 5% of each collection's balance in DTI. Charge-off accounts do not have to be counted.
Checked against the sources below on October 29, 2026. Reviewed by Chris Black, NMLS 275073, on November 2, 2026.
The rules
- Trigger: cumulative outstanding collection balances of $2,000 or more on the credit reports used in TOTAL.
- Option 1: paid in full at or before settlement from an acceptable source of funds.
- Option 2: a payment arrangement with the creditor, with that payment in DTI.
- Option 3: if no payment arrangement is available, 5% of each collection's outstanding balance as a monthly payment in DTI.
- In a community property state, a non-borrowing spouse's collections count toward the $2,000 unless state law excludes them.
- Charge-off accounts do not need to be included in the borrower's liabilities or debt.
- The handbook lists medical collections among obligations not considered debt.
Watch for
- Disputed derogatory accounts totaling $1,000 or more, other than medical, send a TOTAL file to a manual Refer.
- Manual underwriting uses the same $2,000 and 5% rule, plus letters of explanation.
- Lenders can overlay collections, for example by requiring them paid. Confirm yours.
Sources
HUD Single Family Housing Policy Handbook 4000.1, II.A.4.b.iv(M) Collection Accounts (TOTAL)
if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower's DTI.
HUD Single Family Housing Policy Handbook 4000.1, II.A.4.b.iv(N) Charge Off Accounts (TOTAL)
Charge Off Accounts do not need to be included in the Borrower's liabilities or debt.
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