Can I get approved for an FHA loan even if I have a collection account that isn't paid off?

You can still qualify for an FHA loan even if you have an open collection account that hasn't been paid off. There are some requirements that the lender will need to verify, however, in order for you to be approved.

The FHA approved lender will need to determine if your collection account is a result of negligence and/or mismanagement of debt versus a legitimate reason due to mitigating factors or extenuating circumstances that were beyond your control. For example, a job layoff, a divorce, a medical illness, and other circumstances might be viewed in your favor if they are central to the reason that collections activity was taken on your accounts.

FHA doesn't require that collection accounts be paid off, but if you have a collection account balance greater than $2000, then FHA requires that the lender perform something called a "capacity analysis" on your account to see how it might impact your ability to repay a mortgage. We'll get into the details in this article.

FHA does not require that collection accounts be paid off as a condition of mortgage approval

FHA does not require that you pay off your collection accounts in order be approved for an FHA mortgage. However, FHA does recognize that collection efforts by the creditor for unpaid collections could affect your ability to repay the mortgage.

What does an FHA approved lender look at if I have a collection account?

As mentioned earlier, if your collection account has a balance of $2000 or more, then the lender will need to perform a "capacity analysis." Capacity analysis includes any of the following actions:

• If you decide to pay off the collection account at or before the closing of your mortgage, the lender needs to verify the source of funds you use to pay it off. Verifying the source of funds is necessary to make sure you're not just borrowing money elsewhere to pay off the account.
• If you're not paying it off, then the lender wants to see that you've made payment arrangements with the creditor. They'll want a letter or credit report from the creditor that verifies that a monthly payment is required. The FHA lender will factor this monthly payment into your debt-to-income ratio.
• If there is no payment arrangement letter or report provided, then the FHA lender will assume that your monthly payment to the collection account will be 5% of the balance. For example, if your collection account has a balance of $3000, then the lender assumes you will need to pay 5% of $3000 every month. This works out to $150 per month. This payment will be factored into your debt-to-income ratio.

What if my collection account was due to medical bills?

Fortunately, all medical collections and charge off accounts are excluded from FHA guidelines when it comes to rules they impose on lenders. However, each individual lender may have their own guidelines (called overlays) when it comes to medical collection accounts.