Does FHA Require Collections to Be Paid Off?
No. FHA does not automatically require collection accounts to be paid off for a borrower to be eligible for FHA financing.
However, collection accounts still have to be analyzed properly by the lender, and in some cases they can affect debt-to-income ratio (DTI), underwriting, and overall loan approval.
How FHA Treats Collection Accounts
Under current FHA guidelines, whether collections must be paid depends mainly on the total outstanding balance of the collection accounts and how the lender documents the file.
If Total Collections Are Less Than $2,000
In most cases:
- Collections do not have to be paid off
- They are generally not counted against the borrower’s DTI
- The borrower may still need to explain them if underwriting asks
If Total Collections Are $2,000 or More
The lender must address the collections in one of the following ways:
- Verify the collections are paid in full before or at closing
- Verify the borrower has a payment arrangement and include that payment in the DTI
- If no payment arrangement is available, use 5% of the outstanding collection balance as a monthly payment and include that amount in the DTI
So the issue is not always whether collections must be paid off. The real issue is whether they create too much monthly debt for the borrower to qualify.
Manual Underwriting
For manually underwritten FHA loans, collection accounts receive more scrutiny. The lender must determine whether the collections resulted from:
- Disregard for financial obligations
- Inability to manage debt
- Extenuating circumstances
The borrower may also be asked to provide a letter of explanation along with supporting documentation for outstanding collection accounts.
Bottom Line
No, FHA does not require all collections to be paid off. But if total collections are $2,000 or more, the lender must either document payoff, document a payment arrangement, or count 5% of the balance in the borrower’s DTI.
That means collection accounts can still affect approval even if payoff is not required.
Need Help With a Kentucky FHA Loan?
If you are applying for a Kentucky FHA loan and have collection accounts, I can help you review your credit and structure the file correctly before underwriting.
Apply Online: applywithjoel.com
Call/Text: 502-905-3708
Email: kentuckyloan@gmail.com
Joel Lobb
Mortgage Broker – FHA, VA, USDA, KHC
NMLS #57916 | Company NMLS #1738461
Licensed in Kentucky
This is not a commitment to lend. All loans are subject to credit approval and program guidelines. Equal Housing Lender.
Kentucky FHA Mortgage Lender 