Collections and Charge-Offs:
Mortgage Qualification Rules

Every collection, charge-off, or judgment on your credit report ends in one of three outcomes: Pay, Count in DTI, or Ignore. What determines the outcome is not the balance. It is the type of debt, whether it is medical, whether it has become a judgment, and which loan program you are using.

The Three Questions

Run these in order. The order is the decision flow.

Is it medical?

Medical collections are the most forgiving category across every major program. Under FHA TOTAL underwriting, medical collections are explicitly listed in Obligations Not Considered Debt at Handbook 4000.1 II.A.4.(Q), alongside taxes, utilities, and child care . USDA states plainly that "USDA does not require medical collection accounts to be paid" . Fannie Mae's DU rules state that "medical collection accounts are excluded from the limits below and are not required to be paid in full at or prior to closing" . VA goes further: "Lenders may disregard all identifiable medical collections, including charge-off accounts, that have not been reduced to a judgment or lien" . Freddie Mac's significance framework under 5202.1(d) calls out non-medical collections specifically as a trigger for "significant" derogatory credit, leaving medical outside the significance analysis .

If the only collections on the credit report are medical, they will almost certainly not block approval.

Has it been reduced to a judgment?

Judgments are the hardest category across every major program. A judgment is a court-confirmed debt, and every program treats judgments more strictly than regular collections. The leniency that medical collections enjoy disappears the moment the same debt is reduced to a judgment or lien.

Government loans (FHA and USDA). A judgment must be paid in full, or the borrower must show at least 3 months of on-time payments on a documented creditor agreement. Both programs prohibit prepaying scheduled payments to meet the 3-payment minimum. FHA codifies this at 4000.1 II.A.5.(G); USDA codifies it in HB-1-3555 Chapter 10 . Any agreed monthly payment is included in DTI.

Conventional loans (Fannie and Freddie). Fannie Mae's DU judgment rule is blunt: "Open judgments and all outstanding liens that are in the Public Records section of the credit report will be identified in the Underwriting Findings report, and must be paid off at or prior to closing." There is no payment-plan exception . Freddie Mac treats judgments as significant derogatory credit under 5202.1(d), where public records revealing "several occurrences of derogatory credit information, including judgments, tax liens and/or non-medical collection accounts" trigger the significance designation and enhanced scrutiny .

VA loans. A judgment must be paid in full or subject to a repayment plan with a history of timely payments. VA defines a history of timely payments as 12 months on the plan, though an underwriter can justify a shorter history on VA Form 26-6393 if the borrower immediately addressed the judgment after filing . Federal government judgment liens are automatic disqualifiers until paid or otherwise satisfied.

Judgments are the category most likely to block approval outright. The payoff exception paths are narrow.

Which program are you using?

Program choice is the biggest variable for non-medical collections. The size of a non-medical collection matters, but not as much as borrowers expect, and the treatment diverges sharply between the program groups.

Government (FHA TOTAL and USDA). The $2,000 cumulative threshold is the key number. Under $2,000 in cumulative non-medical collection balances, no action is required. At or above $2,000 , the lender must take one of three actions: verify the debt is paid in full at or prior to settlement, verify a payment arrangement with the creditor and include the monthly payment in DTI, or calculate 5% of the outstanding balance as a monthly liability and include that in DTI. USDA lands in the same place with slightly more underwriter discretion in how the file gets reviewed .

Conventional (Fannie DU, 1-unit primary residence). This is the most surprising rule in mortgage underwriting. Fannie Mae's Selling Guide states verbatim: "For one-unit, principal residence properties, borrowers are not required to pay off outstanding collections or non-mortgage charge-offs, regardless of the amount." A borrower buying a primary single-family home with a conventional loan can have large non-medical collections on the credit report and still qualify without paying them off .

VA. No hard payoff requirement exists, but the non-medical collection must be considered in DTI. If the credit report lists a minimum payment, the lender uses that. If there is no listed payment arrangement, VA directs lenders to use 5% of the outstanding balance as the calculated monthly payment . The underwriter still has to address the account on VA Form 26-6393, Loan Analysis.

Investment and 2-4 unit properties are stricter under Fannie DU. Investment property thresholds drop to $250 per individual account or $1,000 total, and 2-4 unit owner-occupied and second home thresholds use $5,000 cumulative. These are the same limits Fannie applies to manually underwritten loans under B3-6-07 .

For FHA manual underwriting (not TOTAL), every collection account requires a letter of explanation per account regardless of dollar amount. This applies when the file is manually underwritten rather than run through the automated scorecard .

Collections and Charge-Offs by Program

Here is how each program actually treats collections and charge-offs in practice:

What Actually Shows Up on Your Credit Report

Before underwriting rules matter, the account has to appear on your credit report. Many collections borrowers worry about are not even visible to lenders.

• The three credit bureaus removed most medical debt starting in 2022 and 2023. Equifax, Experian, and TransUnion announced in March 2023 that they would stop reporting some, but not all, medical bills. Paid medical collections and most small unpaid medical collections were removed from consumer credit reports through this voluntary policy change .
• Newer credit scoring models weight medical collections less heavily. VantageScore removed all medical collection data from one of its scoring models in August 2022. VantageScore 3.0 and newer ignore paid collections of any kind, and FICO Score 9 and newer treat medical collections differently from non-medical collections. Many mortgage lenders still use older FICO models (classic mortgage scores FICO 2, 4, and 5), so the impact is uneven .
• The CFPB's medical debt rule was vacated in July 2025. The CFPB finalized a rule on January 7, 2025 that would have banned medical bills from credit reports used by lenders. A U.S. District Court in the Eastern District of Texas vacated the rule on July 11, 2025 in Cornerstone Credit Union League v. CFPB, holding that the rule exceeded the Bureau's statutory authority under the Fair Credit Reporting Act. As of 2026, no federal rule prohibits medical debt on credit reports; only the bureaus' voluntary 2022-2023 policy changes remain in effect .

Collections also fall off credit reports after seven years under the Fair Credit Reporting Act , with the clock starting 180 days after the account first became delinquent. For a borrower with only medical collections, the practical effect is that many of those collections are not on the credit report in the first place, and the ones that remain are explicitly excluded by every major loan program's underwriting rules.

Common Mistakes

• Paying collections that do not need to be paid. The biggest real-world mistake. Paying a stale collection can reactivate the account on older mortgage FICO models, reset the 7-year FCRA clock, lower your score, and waste cash you need at closing. Before paying anything, confirm whether your loan program even requires payoff and whether the account is about to age off the report on its own.
• Assuming conventional is always the strictest program. Fannie DU is actually the most lenient for routine non-medical collections on a 1-unit primary residence. FHA is stricter once cumulative non-medical collections cross the $2,000 threshold.
• Treating all collections as equally bad. A single $400 medical collection and a single $4,000 judgment are not the same problem. Medical is the most forgiving category; judgments are the hardest.
• Not verifying which collections actually appear on the credit report. Medical collections were removed by the bureaus in the 2022-2023 rounds. A collection the borrower remembers may not be on the report at all.
• Waiting to tell the loan officer about a known collection. Collections that surface during underwriting after preapproval can restart the loan analysis or delay closing. Disclose early so the underwriter can plan the path.

What to Do Next

• If all your collections are medical: They are almost certainly not blocking your mortgage approval. Confirm with your loan officer which program you're using and verify nothing has been reduced to a judgment or lien.
• If you have non-medical collections under $2,000 total: You are under the FHA and USDA threshold. Fannie DU on a 1-unit primary requires no payoff regardless of amount. Verify whether your loan program is government or conventional and move forward.
• If you have non-medical collections over $2,000 total and you're using FHA or USDA: Pick one of three paths: pay in full, document a written repayment plan with the creditor, or let the lender calculate 5% of the balance as a monthly liability in DTI. Pick the option that preserves your DTI headroom.
• If you have any judgment: Assume you will need to pay it off or enter a documented payment plan before closing. FHA and USDA allow the 3-payment plan path; VA requires 12 months of history; Fannie typically requires full payoff.
• If you're not sure what appears on your credit report: Pull your credit report from AnnualCreditReport.com before applying. The bureaus' 2022-2023 changes mean the current report may look different than you expect.

Key Takeaways

• Every collection, charge-off, or judgment has one of three outcomes: Pay, Count, or Ignore. Which one applies is decided by the type of debt and the loan program group.
• Medical collections are the most forgiving category across every major program. Judgments are the hardest.
• Government loans (FHA and USDA) use a $2,000 cumulative threshold for non-medical collections, with USDA allowing more underwriter discretion than FHA.
• Fannie DU on a 1-unit primary residence does not require payoff of non-medical collections or non-mortgage charge-offs regardless of amount. This is the single most surprising rule in mortgage underwriting.
• VA counts non-medical collections in DTI at the listed payment or 5% of the balance, but does not require payoff.
• The CFPB's medical debt rule was vacated in July 2025. Only the credit bureaus' voluntary 2022-2023 reporting changes remain in effect.