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Collections, Judgments, and Liens on Mortgage Applications

Collections, judgments, and liens are derogatory items on a credit report that indicate debts were not resolved through normal payment channels. Each is treated differently in mortgage underwriting: collections may be acceptable under certain conditions, while judgments and liens are title issues that must be resolved before closing regardless of the borrower's credit score.

Key Takeaways

  • Medical collections are treated more favorably than non-medical collections by both FICO scoring models and mortgage underwriting guidelines.
  • FHA requires that non-medical collections with an aggregate balance of $2,000 or more be either paid off or factored into the DTI ratio at 5% of the outstanding balance as an assumed monthly payment .
  • Conventional loan guidelines (Fannie Mae/Freddie Mac) do not require collections to be paid off as a condition of approval, though the score impact of collections must still be managed.
  • Outstanding judgments and liens are title issues that must be resolved before or at closing, regardless of loan program or credit score.
  • Paying off a collection on older FICO models used for mortgages may not improve the score and can temporarily decrease it by updating the date of last activity.
  • Tax liens (federal and state) are among the most serious derogatory items and require either full payoff or an approved payment plan with documented payments before closing.
  • Borrowers should disclose all known collections, judgments, and liens to their loan officer at the start of the process to develop a resolution strategy.

How It Works

Collection Account Lifecycle

A collection account begins when a creditor determines that a debt is unlikely to be recovered through its normal collection efforts. The creditor may assign the debt to an internal collections department, sell the debt to a third-party collection agency, or charge off the account (write it off as a loss) and transfer it to collections. The original account is updated on the credit report to reflect the charge-off or transfer, and a new collection tradeline appears under the collection agency’s name.

The collection tradeline includes the balance owed, the original creditor, the date the account was placed in collections, and the payment status (open, paid, settled). The tradeline remains on the credit report for seven years from the date of the original delinquency, not from the date of the collection assignment. This means that even a newly acquired collection may have a relatively short remaining reporting period if the underlying delinquency occurred years ago.

Underwriting Treatment by Loan Program

Each loan program has specific guidelines for evaluating collections. For FHA loans, the underwriter must identify all collection accounts, separate medical from non-medical, calculate the aggregate balance of non-medical collections, and apply the appropriate treatment (payoff or DTI inclusion if the aggregate exceeds the $2,000 threshold ). For conventional loans, the underwriter evaluates collections as part of the overall credit assessment but is not required to apply specific balance thresholds or assumed payments.

VA loans generally follow conventional treatment for collections, with the underwriter evaluating the borrower’s overall residual income and credit history. USDA loans have guidelines similar to FHA in some respects, requiring evaluation of outstanding collections and potential inclusion in DTI .

Individual lenders may impose overlays (additional requirements beyond agency guidelines) that are stricter. A lender may require all collections above $500 to be paid regardless of what the agency guidelines allow. Borrowers should ask their loan officer about the specific lender’s overlay requirements early in the process.

Judgment and Lien Resolution Process

When a title search reveals an outstanding judgment or lien, the title company will require proof of resolution before issuing title insurance. Resolution typically involves one of three paths: paying the judgment or lien in full and obtaining a satisfaction or release document, establishing a payment plan with the creditor or taxing authority and providing evidence of compliance, or negotiating a settlement (paying less than the full amount owed) with a release document from the creditor.

For tax liens specifically, the IRS or state taxing authority may issue a subordination, which allows the mortgage lien to take priority over the tax lien without requiring full payoff. Subordination is not guaranteed and requires a formal application process. The borrower must demonstrate that the subordination is in the government’s interest (typically because the mortgage enables the borrower to maintain the property and continue making tax payments).

Payment plans for judgments and tax liens must be documented in the mortgage file. Most loan programs require evidence that the plan has been in place for at least three months with no missed payments. The monthly payment under the plan is included in the borrower’s DTI calculation.

Score Recovery After Collection Resolution

The score impact of resolving a collection depends on the scoring model and the method of resolution. Under older FICO models used for mortgages, paying a collection in full updates the date of last activity, which can cause a short-term score dip. Settling a collection for less than the full amount results in a “settled” status, which is less favorable than “paid in full” but still better than “open” in most underwriters’ assessment.

For borrowers with collections, the timing of payoff relative to the mortgage application is important. If the borrower plans to pay collections before applying, doing so at least 30-60 days before the credit pull allows the updated status to be reported and any temporary score disruption to stabilize. If the borrower is already in the application process, the loan officer may recommend waiting until the underwriter specifies which collections must be resolved, to avoid unnecessary payoffs that do not improve the file.

Related topics include minimum credit score requirements by loan type, what lenders see on your credit report, late payments and mortgage qualification, bankruptcy and mortgage waiting periods, mortgage after foreclosure or short sale, and credit repair strategies before applying for a mortgage.

Key Factors

Factors relevant to Collections, Judgments, and Liens on Mortgage Applications
Factor Description Typical Range
Medical vs. Non-Medical Classification Medical collections receive more favorable treatment in both scoring and underwriting. Non-medical collections are subject to stricter rules, including FHA's aggregate balance thresholds. Medical: often excluded from aggregate calculations. Non-medical: included in aggregate balance thresholds and subject to payoff or DTI requirements.
Aggregate Collection Balance The total outstanding balance across all collection accounts. FHA applies specific rules when the non-medical aggregate exceeds $2,000 . Under $2,000 non-medical: FHA may not require action. $2,000+: payoff or 5% assumed monthly payment . Conventional: no specific threshold but score impact applies.
Age of Collection How long ago the original delinquency occurred. Older collections have less score impact and are viewed more favorably by underwriters. Less than 12 months: high concern. 1-3 years: moderate concern. 4-7 years: diminishing impact. Falls off report after 7 years.
Judgment or Lien Status (Outstanding vs. Satisfied) Outstanding judgments and liens are title issues that must be resolved before closing. Satisfied judgments or released liens are not title impediments but still appear in public records. Outstanding: must be resolved before closing. Satisfied: no title issue but underwriter may evaluate the history.
Payment Plan Compliance For judgments and tax liens on payment plans, the number of consecutive on-time payments made under the agreement. Most programs require at least 3 consecutive on-time payments under an established plan .

Examples

FHA Borrower with Non-Medical Collections Exceeding Threshold

Scenario: A borrower applying for an FHA loan has three non-medical collection accounts: $1,400 (cable company), $900 (credit card), and $1,200 (personal loan). The aggregate non-medical collection balance is $3,500. The borrower has a 620 FICO score and a 42% DTI ratio before accounting for collections.
Outcome: Because the aggregate non-medical collection balance exceeds $2,000, the underwriter must either require the borrower to pay off the collections or add an assumed monthly payment of $175 ($3,500 x 5%) to the DTI calculation. Adding $175 pushes the DTI to approximately 46%, which may exceed FHA limits . The borrower may need to pay off at least enough collections to bring the aggregate below $2,000, or provide compensating factors to justify the higher DTI.

Outstanding Tax Lien Discovered During Title Search

Scenario: A borrower applying for a conventional purchase loan has a federal tax lien of $14,000 filed by the IRS two years ago. The borrower has been on a payment plan for 10 months, paying $500 per month. The tax lien was not initially disclosed by the borrower.
Outcome: The title company flags the outstanding lien during the title search. The borrower provides the IRS installment agreement and bank statements showing 10 consecutive monthly payments. The lender includes the $500 monthly payment in the DTI calculation. Because the payment plan is established and the borrower has more than three months of compliance, the lien can remain in place (or the borrower may request an IRS subordination). The failure to disclose initially may prompt additional underwriting scrutiny.

Medical Collections on Conventional Loan Application

Scenario: A borrower with a 710 FICO score has two medical collections totaling $6,800 from an emergency surgery three years ago. The borrower is applying for a conventional loan with strong income and 15% down payment.
Outcome: Under Fannie Mae guidelines, the underwriter is not required to make the borrower pay off the medical collections. The collections are factored into the FICO score, which at 710 already meets the program minimum. The AUS evaluates the overall profile and issues an approval. The borrower provides a letter of explanation regarding the medical event. No additional conditions related to the collections are imposed.

Common Mistakes to Avoid

  • Paying off collections immediately before a mortgage application without understanding the scoring impact

    Under older FICO models used for mortgages, paying a collection updates the date of last activity and can temporarily suppress the score. Borrowers should consult with their loan officer about timing and whether payoff is required by their specific loan program before making payments.

  • Failing to distinguish between medical and non-medical collections when evaluating FHA eligibility

    FHA's $2,000 aggregate threshold applies only to non-medical collections. Medical collections are excluded from this calculation. Borrowers who assume all collections count toward the threshold may unnecessarily pay off medical debts or overestimate their DTI impact.

  • Not disclosing known judgments or liens to the loan officer at the start of the process

    Judgments and liens will surface during the title search regardless of whether the borrower discloses them. Late discovery causes delays, may require last-minute payoffs that drain closing funds, and damages trust with the underwriter. Early disclosure allows the loan officer to build a resolution strategy into the timeline.

  • Assuming that paying a collection in full removes it from the credit report

    Paying a collection changes its status to 'paid' but does not remove the tradeline from the credit report. The collection history remains for seven years from the original delinquency date. Only a creditor's agreement to delete the tradeline (pay-for-delete) or a successful dispute removes the entry, and neither is guaranteed.

Documents You May Need

  • Tri-merge credit report showing all collection accounts, judgments, and liens
  • Letter of explanation for each collection, judgment, or lien
  • Proof of payment or settlement for resolved collections (cancelled checks, payment confirmations, settlement letters)
  • IRS installment agreement or state tax payment plan documentation (for tax liens)
  • Satisfaction of judgment or lien release documentation (from court or creditor)
  • Bank statements showing consecutive payment plan payments (minimum 3 months)

Frequently Asked Questions

Do I have to pay off all collections before getting a mortgage?
Not necessarily. The requirement depends on the loan program and the type of collection. Conventional loans (Fannie Mae/Freddie Mac) generally do not require collections to be paid off. FHA loans require action on non-medical collections when the aggregate balance is $2,000 or more. Individual lenders may have stricter overlay requirements. Consult your loan officer to understand what applies to your specific situation.
Can I get a mortgage with an outstanding judgment?
An outstanding judgment is a title issue that must be resolved before closing. You cannot receive clear title with an unpaid judgment. However, resolution does not always mean paying the full amount. Options include full payment, a negotiated settlement with a release, or establishing a payment plan with at least three consecutive payments documented. The judgment must be addressed before or at closing.
How do medical collections affect my mortgage application differently from other collections?
Medical collections receive preferential treatment. Fannie Mae does not require borrowers to pay off medical collections. FHA excludes medical collections from the $2,000 aggregate non-medical threshold. Newer FICO scoring models reduce or eliminate the score impact of medical collections, though mortgage lenders often use older models where medical collections still affect the score to some degree.
Will settling a collection for less than the full amount hurt my application?
A settled collection shows as 'settled for less than full balance' on the credit report, which is slightly less favorable than 'paid in full.' However, from an underwriting perspective, a resolved collection (whether settled or paid in full) is better than an outstanding one. Settlement also reduces the DTI impact under FHA guidelines. Discuss settlement strategies with your loan officer before proceeding.
How long do I need to be on a payment plan for a tax lien before I can qualify for a mortgage?
Most loan programs require at least three consecutive on-time payments under an established tax payment plan. The plan must be formally documented (IRS installment agreement or state payment plan), and the monthly payment is included in the DTI calculation. FHA, VA, and conventional programs all have similar requirements for documented payment plan compliance .
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