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Collections, Judgments, and Liens on Mortgage Applications

Do You Need to Pay This Before Closing?

  • Every account is paid, counted in DTI, or ignored.
  • Medical collections usually ignored across all major programs.
  • FHA and USDA: $2,000 cumulative non-medical threshold.
  • Fannie DU 1-unit primary: no payoff required, any amount.
  • Judgments are harder than collections almost everywhere.

Three outcomes: Pay off, count in DTI, or ignore

Medical collections: Usually ignored across FHA, USDA, Fannie, Freddie, VA

FHA and USDA threshold: Cumulative non-medical balance of $2,000 or more

Fannie DU 1-unit primary: No payoff required regardless of amount

VA non-medical collections: Included in DTI at 5% of balance; payoff not required

Judgments: Payoff or qualifying payment plan history required on most programs

What This Means

Many borrowers assume every collection must be paid before applying. On a Fannie Mae conventional loan for a 1-unit primary residence, routine collections do not have to be cleared at all.
Program choice changes the answer: $3,000 in credit card collections is a payoff requirement on FHA, a DTI add-on on VA, and a non-issue on Fannie DU primary.
Judgments sit above collections: Most programs require payoff or a qualifying payment-plan history before closing.

Where Your Collection Lands: Pay, Count, or Ignore

  • If Your only derogatory accounts are medical collections, any program: Leave them alone. Do not pay, do not negotiate. They are excluded or disregarded across FHA, USDA, Fannie, Freddie, and VA.
  • If You have non-medical collections under $2,000 cumulative and are pursuing FHA or USDA: Leave them. The TOTAL and GUS thresholds are not triggered. Do not reset account dates before application.
  • If You have non-medical collections of any amount and are pursuing Fannie DU on a 1-unit primary residence: Leave them. Fannie DU requires no payoff regardless of balance. Confirm with your loan officer that the lender will not mark 'Paid By Close' in the application.
  • If You have $2,000 or more in cumulative non-medical collections on FHA or USDA: Negotiate a verified payment arrangement with each creditor before application. The negotiated payment replaces the 5% default DTI calculation and usually lowers it.
  • If You have a judgment on your credit report: Set up a creditor payment agreement and begin making scheduled payments immediately. Plan on at least 3 on-time payments for FHA and USDA, or 12 months for VA, before your loan closes .
  • If You are buying an investment property on Fannie DU: Pay off every individual non-medical collection at or above $250 and verify combined non-medical balances do not exceed $1,000 .
Collections, charge-offs, judgments, and tax liens are derogatory items lenders must classify before approving a mortgage. Every account has one of three outcomes: pay off at closing, count in debt-to-income, or ignore. The rules split cleanly into three program groups: Government (FHA and USDA), Conventional (Fannie and Freddie), and VA. Medical collections are the forgiving exception across every program; judgments are the strictest category.

Key Takeaways

  • Every collection or charge-off resolves to one of three outcomes: pay off, count in DTI, or ignore.
  • Medical collections are usually ignored across FHA, USDA, Fannie, Freddie, and VA.
  • FHA and USDA share a $2,000 cumulative non-medical threshold; crossing it triggers payoff, a payment arrangement in DTI, or a 5% default calculation .
  • Fannie DU on a 1-unit primary residence requires no payoff for routine collections and non-mortgage charge-offs, regardless of amount.
  • VA does not require non-medical collection payoff but adds 5% of the outstanding balance to DTI when no payment arrangement exists .
  • Judgments are harder than collections and usually require payoff or a qualifying payment plan history.

Fannie DU ignores routine collections on 1-unit primary residences, regardless of amount

The Fannie Mae Selling Guide Section B3-5.3-09 is explicit: on a 1-unit primary residence, borrowers are not required to pay off outstanding collections or non-mortgage charge-offs regardless of the amount. A borrower with $8,000 in old credit card collections can close a Fannie conventional loan on their primary home without touching a single account. The one operational gotcha: if the loan officer marks a collection 'Paid By Close' in the online application, DU will issue a finding that the collection must be paid, turning a non-requirement into a requirement. Confirm the lender leaves those flags alone.

Paying an old collection can reactivate it on older FICO models

Most mortgage lenders pull older FICO models (FICO 2, 4, and 5) that may update the account's recency date when a collection is paid. The result: a well-intentioned payoff can briefly lower your mortgage-qualifying score in the weeks before application. Newer models like FICO 9 and VantageScore 3.0 and newer treat paid collections differently, but those are not the scores your mortgage lender is using. The rule of thumb: do not touch old collections in the 90 days before application without running the math with your loan officer first.

The FCRA 7-year clock starts 180 days after first delinquency, not at the collection date

Under 15 U.S.C. 1681c, the seven-year reporting window for collections begins 'upon the expiration of the 180-day period beginning on the date of the commencement of the delinquency which immediately preceded the collection activity.' That means the clock started when you first fell behind with the original creditor, not when the account was sold to a collection agency. Some old accounts may already be past the reporting window and invisible to underwriting. Pull your report before committing to any payoff plan.

How It Works

Do You Need to Pay This Before Closing?

Three outcomes: Every account is either paid off, counted in DTI, or ignored.

Medical collections: Usually ignored across FHA, USDA, Fannie, Freddie, and VA.

FHA and USDA threshold: Cumulative non-medical balance of $2,000 or more triggers action .

Fannie DU, 1-unit primary: No payoff required regardless of amount .

VA: Non-medical collections added to DTI at 5% of balance; payoff not required if credit is acceptable .

Judgments: Hardest category. Most programs require payoff or a documented payment plan.

What This Means

You may owe less than you think: Many borrowers assume every collection must be paid off. For a 1-unit primary residence on a Fannie Mae conventional loan, routine collections do not have to be cleared at all.

Program choice matters: The same $3,000 in credit card collections is a payoff requirement on FHA, a DTI add-on for VA, and a non-issue for Fannie DU on a primary residence.

Judgments are different: They sit above collections in severity and usually require either payoff or a qualifying payment-plan history.

What Is a Collection vs a Charge-Off

A collection account exists when a creditor transfers an unpaid debt to a third-party collection agency. Per HUD, a collection account is "a Borrower's loan or debt that has been submitted to a collection agency by a creditor." The original creditor is no longer the counterparty; a collection agency is.

A charge-off is earlier in the process. HUD defines it as "a Borrower's loan or debt that has been written off by the creditor." The creditor has concluded the debt is unlikely to be collected and has removed it from its active accounts receivable. USDA uses similar language: a charge-off is "a debt that was determined unlikely to be collected by the creditor due to substantial delinquency."

On a credit report the two can look similar, and sometimes the same underlying debt progresses from charge-off to collection. But the underwriting rules differ. FHA TOTAL, for example, excludes charge-offs from the borrower's liabilities entirely while still enforcing a $2,000 collections threshold .

The Three Outcomes: Pay, Count, or Ignore

Every collection or charge-off on your credit report has exactly one of three possible outcomes under a lender's rules:

  • Pay: The debt must be paid in full at or before closing. Judgments and large non-medical balances on strict programs sit here.
  • Count: The debt is not paid off, but a monthly payment is added to your debt-to-income ratio. The payment is either a verified arrangement with the creditor or a default calculation of 5% of the outstanding balance .
  • Ignore: The debt is disregarded for underwriting. Medical collections typically fall here, as do routine collections on Fannie DU for a 1-unit primary residence.

This Pay/Count/Ignore lever is the anchor for the rest of this page. Every rule below resolves to one of those three outcomes.

How Loan Programs Treat Collections

The five major underwriting systems cluster naturally into three groups.

Government (FHA and USDA). Both programs use a hard $2,000 cumulative threshold for non-medical collections . If your non-medical collection balances total $2,000 or more, FHA TOTAL and USDA require one of three responses: pay the accounts in full at closing, enter a verified payment arrangement and include the payment in DTI, or default to 5% of the outstanding balance added to DTI. USDA is similar to FHA rather than identical; USDA underwriters retain more discretion and GUS (USDA's automated system) may require additional file documentation. FHA manual underwriting is different from FHA TOTAL and requires a letter of explanation for every collection, with no $2,000 threshold.

Conventional (Fannie Mae and Freddie Mac). Fannie publishes the most specific rules through Desktop Underwriter. On a 1-unit primary residence, borrowers "are not required to pay off outstanding collections or non-mortgage charge-offs, regardless of the amount" . On 2-4 unit owner-occupied properties and second homes, cumulative collections and charge-offs above $5,000 must be paid in full . On investment properties, any individual account of $250 or more, or combined balances above $1,000, must be paid off . Fannie's manual underwriting path uses the same $250 individual / $1,000 total limits. Freddie Mac operates differently. Section 5202.1 of the Seller/Servicer Guide uses a significance-based framework rather than dollar thresholds. Non-medical collections are called out as part of a "significant derogatory" evaluation, and LPA Findings drive the actual loan-level decision.

VA. VA does not require non-medical collection accounts to be paid off if the borrower's overall credit is acceptable. Instead, the account is included in the debt-to-income ratio. Where the creditor has not set a minimum payment, VA directs underwriters to use 5% of the outstanding balance . An underwriter must still address the account on VA Form 26-6393 and justify the approval.

How Loan Programs Treat Charge-Offs

Charge-offs are usually treated more leniently than collections under the automated systems. Under FHA TOTAL, charge-offs "do not need to be included in the Borrower's liabilities or debt." Under USDA, the Handbook is explicit: "USDA does not require charge-off accounts to be paid." Fannie DU applies the same rules to charge-offs that it applies to collections, which for a 1-unit primary residence means no payoff is required regardless of amount. VA requires the underwriter to address the circumstances but exempts identifiable medical charge-offs.

The exception is manual underwriting. FHA manual underwriting requires a letter of explanation for each charge-off account and applies the same disregard/inability/extenuating-circumstances analysis used for collections. Freddie's significance framework also captures charge-offs as potentially significant derogatory credit.

What Most Borrowers Miss

Fannie DU does not require you to pay off routine collections or non-mortgage charge-offs on a 1-unit primary residence, regardless of balance. A borrower with $8,000 in old credit card collections can close a conventional loan on their primary home without touching any of them. The surprise works in reverse for investment property borrowers, where any single account of $250 or more must be paid off. Pick the program before you pay anything.

How Loan Programs Treat Judgments and Tax Liens

Judgments are the strictest category across every program. A judgment is a court-confirmed debt; a tax lien is a government claim against the borrower's property. Both create title issues that can affect the lender's lien position, which is why the rules are tighter than those for routine collections.

Government (FHA and USDA). Both programs require court-ordered judgments to be paid in full at or before closing, OR resolved through a documented creditor agreement with at least 3 scheduled on-time payments. The borrower cannot prepay scheduled payments to meet the 3-payment minimum . The agreed monthly payment is included in DTI. USDA additionally treats delinquent federal non-tax debt as an automatic disqualifier until paid in full or released; CAIVRS flags must be cleared.

Conventional (Fannie and Freddie). Fannie's rule is the strictest of the five programs: "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 treats judgments as significant derogatory credit under 5202.1(d), where public records revealing "judgments, tax liens and/or non-medical collection accounts" trigger the significance designation and enhanced scrutiny.

VA. A judgment must be paid in full or subject to a repayment plan with 12 months of timely payments, though an underwriter can justify a shorter history if the borrower immediately addressed the judgment after filing . Federal government judgment liens against the borrower's property are automatic disqualifiers until satisfied.

Tax liens and other liens. Federal tax liens, state tax liens, mechanic's or materialmen's liens, and any lien that could affect the lender's first-lien position are treated like judgments across most programs: they generally must be paid off at or before closing or resolved with documented evidence. Fannie explicitly lumps tax liens with judgments in the payoff requirement under B3-6-07. FHA and USDA allow IRS installment agreements with at least 3 timely payments to satisfy the requirement for delinquent federal taxes.

Medical Collections Are the Easy Case

Medical collections are the most forgiving category of derogatory credit across every major program. FHA TOTAL lists medical collections under "Obligations Not Considered Debt," meaning they are excluded from underwriting analysis entirely. USDA's Chapter 10 states directly that "USDA does not require medical collection accounts to be paid." Fannie DU excludes medical collections from all payoff thresholds, including the investment-property limits. Freddie's significance framework consistently uses "non-medical" when listing derogatory items, treating medical implicitly more leniently. VA tells underwriters they "may disregard all identifiable medical collections, including charge-off accounts, that have not been reduced to a judgment or lien" and do not need to obtain explanations or otherwise address such accounts.

The three national credit bureaus also announced voluntary changes in 2022 and 2023 that removed paid medical collections and most small unpaid medical collections from consumer credit reports. A federal rule finalized by the CFPB in January 2025 that would have banned medical bills from credit reports used by lenders was vacated in July 2025 by a U.S. District Court in the Eastern District of Texas . As of today, no federal rule prohibits medical debt on credit reports, but the bureaus' voluntary 2022-2023 policy changes remain in effect.

Impact on DTI

When a collection is "counted" rather than paid or ignored, it usually lands in your debt-to-income ratio as a monthly obligation. The default calculation across FHA, USDA, and VA is 5% of the outstanding balance . On a $4,000 non-medical collection with no verified payment arrangement, that is $200 added to monthly debts. On a borrower with $6,000 in gross monthly income, that single line item raises DTI by over 3 percentage points, potentially pushing a marginal file out of qualification.

The alternative is a verified payment arrangement with the creditor. If the collector has agreed to, say, $75 per month, the file uses the $75 figure instead of 5% of balance. This is often materially lower, which is one reason a quick call to the collector before application can be more effective than payoff.

Impact on Credit Score

Credit scoring models have evolved on medical collections and on paid collections generally. CFPB's January 2025 letter to the Massachusetts legislature confirmed that VantageScore removed all medical collection data from one of its scoring models in August 2022. CFPB research reported that "VantageScore 3.0 and newer ignore paid collections of any kind, including medical collections," and that newer FICO models such as FICO Score 9 treat medical collections differently than older models.

The operational gotcha is that most lenders still pull older FICO models (FICO 2, 4, and 5) for mortgage qualification. A paid collection may still be weighing on your mortgage FICO scores even though a newer consumer-facing score has already moved on. Paying an old collection can also, on some older models, reactivate the account date and temporarily lower scores. This is the single biggest argument against paying old collections immediately before applying for a mortgage.

Strategy: Pay, Settle, or Leave Alone

The right action depends on the program you are pursuing and the character of the debt.

Leave alone when: The debt is medical, or it is a routine non-medical collection and you are pursuing Fannie DU on a 1-unit primary residence. Paying old collections right before applying can reset account dates on older FICO models and briefly lower your score.

Count it in DTI when: You are pursuing FHA, USDA, or VA and the debt is under control. Negotiate a verified payment arrangement with the creditor before application so your lender can use the agreed payment rather than the 5% default.

Pay in full when: The debt is a judgment, the balance is small enough that 5% materially hurts DTI, or you are on a program and property type that require payoff (Fannie investment property with individual accounts at or above $250, FHA or USDA when the cumulative non-medical balance is $2,000 or more). Document the payoff with a paid-in-full letter and source-of-funds paperwork.

Settle when: You cannot afford full payoff but the debt is triggering a payoff requirement. Be aware that settled balances may be reported as "settled for less than full" and can create their own scoring friction. This is typically a last resort, not a first choice. For more detail on mortgage program rules, see the FHA loans explained, VA loans explained, and conventional loans explained pages. For context on how these balances affect your qualifying numbers, see credit scores and mortgages and debt-to-income ratio explained. For a deeper program-by-program comparison, see the companion insight article on collections and charge-offs.

Collection vs Charge-Off: Key Differences

Factor Collection Charge-Off
Creditor status Original creditor transferred the debt to a third-party collection agency. Original creditor has written the debt off its books as unlikely to be collected.
How it appears on the report Listed as a collection account with the collection agency as the reporting party. Listed with the original creditor and a charge-off status, sometimes alongside a related collection entry.
FHA TOTAL treatment Payoff, payment arrangement in DTI, or 5% default calculation if cumulative non-medical balance reaches $2,000 . Not included in borrower's liabilities or debt under FHA TOTAL.
FHA manual underwriting treatment Letter of explanation required for each account regardless of balance. Letter of explanation required for each account with the same disregard/inability/extenuating analysis as collections.
FCRA 7-year clock Runs from 180 days after the original delinquency that preceded the collection. Runs from 180 days after the original delinquency that preceded the charge-off.

Key Factors

Factors relevant to Collections, Judgments, and Liens on Mortgage Applications
Factor Description Typical Range
FHA and USDA cumulative non-medical collection threshold Combined balance across all non-medical collection accounts that triggers the payoff / payment-plan / 5% DTI decision under FHA TOTAL and USDA GUS. $2,000 or more
Default DTI calculation with no payment arrangement Percentage of outstanding collection balance added to the borrower's monthly debts when the creditor has not provided a verified payment arrangement (FHA, USDA, VA). 5% of outstanding balance
Fannie DU 1-unit primary residence Payoff requirement for outstanding non-mortgage collections and charge-offs on a 1-unit primary residence financed through Desktop Underwriter. No payoff required regardless of amount
Fannie DU investment property threshold Account-level and cumulative thresholds that trigger a payoff requirement on Fannie DU investment-property loans. Individual account $250 or more, or combined total above $1,000
Judgment payment plan minimum (FHA and USDA) Minimum number of scheduled, on-time payments on a valid creditor agreement before a judgment is considered resolved. Prepayment does not count. 3 scheduled on-time payments, no prepay
Judgment payment plan minimum (VA) Timely payment history required on a judgment repayment plan under VA Lender's Handbook M26-7 Chapter 4. 12 months of timely payments

Examples

Medical collections on FHA

Scenario: A first-time buyer has $1,500 across three medical collection accounts, a 720 FICO score, no other derogatory credit, and is pursuing an FHA purchase.
Outcome: Medical collections are listed under 'Obligations Not Considered Debt' for FHA TOTAL. The collections are ignored entirely. No payoff, no DTI addition, no letter of explanation. The file proceeds on the strength of the rest of the credit profile.

Non-medical collections: FHA vs Fannie DU

Scenario: A borrower has $3,200 in cumulative non-medical collections spread across three old credit card accounts. They are choosing between an FHA loan and a Fannie Mae conventional loan on a 1-unit primary residence.
Outcome: On FHA, the $3,200 exceeds the $2,000 threshold. The borrower must pay off the accounts, negotiate verified payment arrangements and include payments in DTI, or default to 5% of each balance in DTI . On Fannie DU for a 1-unit primary, no payoff is required regardless of amount. The conventional path is cleaner for this file.

Judgment across programs

Scenario: A borrower has a $4,800 court judgment from an unpaid medical bill that was reduced to judgment 18 months ago. They are shopping FHA, VA, and Fannie conventional.
Outcome: FHA accepts the judgment if the borrower enters a creditor agreement and completes at least 3 scheduled on-time payments, which cannot be prepaid . VA requires 12 months of timely payments on a repayment plan or payoff in full . Fannie requires payoff at or before closing with no payment-plan exception. FHA is the fastest path if the borrower can set up a plan and begin making payments immediately.

Common Mistakes to Avoid

  • Paying off old collections right before applying

    Most mortgage lenders pull older FICO models that can reset the account recency date when a collection is paid, temporarily lowering the score. Ask your loan officer which score will be pulled before touching any account more than a few years old.

  • Assuming conventional is always the strictest program

    Fannie DU on a 1-unit primary residence requires no payoff for routine collections or non-mortgage charge-offs regardless of amount. On the same file, FHA would require action if the cumulative non-medical balance reaches $2,000. Pick the program before you start paying.

  • Treating all collections as equally bad

    Medical collections are nearly ignored across FHA, USDA, Fannie, Freddie, and VA. A borrower who pays medical collections to 'clean up' the report may have just spent cash that would have been more useful as reserves or closing funds.

  • Not verifying which collections actually appear on the report

    Under the Fair Credit Reporting Act, the 7-year reporting clock starts 180 days after the original delinquency, not at the date the collection was first reported. Some accounts may already be past the reporting window and invisible to underwriting. Pull your credit report before committing to payoff.

  • Waiting to disclose collections to the loan officer

    Collections, charge-offs, and judgments all show up in the underwriting pull. Volunteering the context up front lets your loan officer steer you to the program that treats the debt most favorably. Omitting them guarantees friction when the credit report arrives.

Documents You May Need

  • Current tri-merge credit report showing all collection, charge-off, and judgment accounts
  • Letter of explanation for each outstanding collection account (required on FHA manual underwriting)
  • Verified payment arrangement or repayment agreement from each collector or creditor
  • Proof of payment in full for any account being paid at or before closing
  • Police report or creditor documentation supporting identity-theft or unauthorized-use disputes
  • Court documentation and satisfaction-of-judgment records for any judgment resolved at closing

Frequently Asked Questions

Do I have to pay off all my collections to get a mortgage?

No. For most borrowers, some collections can stay unpaid. A borrower on Fannie DU financing a 1-unit primary residence is not required to pay off routine collections or non-mortgage charge-offs regardless of amount. FHA and USDA only require action when cumulative non-medical balances reach $2,000 or more . VA does not require payoff if overall credit is acceptable; instead the account is counted in your debt-to-income ratio.

Are medical collections treated the same as credit card collections?

No. Medical collections are significantly more forgiving across every major program. FHA TOTAL lists medical collections under 'Obligations Not Considered Debt.' USDA does not require medical collection accounts to be paid. Fannie DU excludes medical collections from all payoff thresholds. VA allows lenders to disregard identifiable medical collections entirely. Freddie's significance framework consistently addresses non-medical collections, treating medical implicitly more leniently.

What happens if I have a judgment on my credit report?

Judgments are the strictest category. FHA and USDA require payoff at or before closing, or at least 3 on-time scheduled payments under a valid creditor agreement (you cannot prepay to meet that minimum) . VA requires 12 months of timely payments on a repayment plan or payoff in full. Fannie and Freddie generally require payoff at or before closing; open judgments identified in the public records section must be satisfied.

Will paying an old collection hurt my credit score?

It can, on the scoring models most lenders use for mortgages. Most mortgage lenders pull older FICO versions (FICO 2, 4, and 5) that may reset an account's recency date when it is paid, temporarily lowering the score. Newer scoring models such as FICO 9 and VantageScore 3.0 and newer treat paid collections differently and in some cases ignore them entirely. Before paying an old collection immediately before applying, talk to your loan officer about which score will be pulled.

Does the $2,000 FHA threshold apply to all collections combined or just one?

It is cumulative. FHA TOTAL looks at the total outstanding balance across all non-medical collection accounts on the credit report. If the combined balance is $2,000 or more, the lender must do one of three things: verify payoff at or before closing, verify a payment arrangement and include the payment in DTI, or default to 5% of the outstanding balance in DTI . USDA uses an effectively identical rule.

My spouse is not on the loan. Do their collections matter?

It depends on whether you live in a community property state. FHA rules state that collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance analysis, unless excluded by state law. Judgments of a non-borrowing spouse in a community property state must be resolved or paid in full with the same state-law exception. Outside community property states, a non-borrowing spouse's collections typically do not affect the file.

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