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Can You Get Approved for FHA Loan with Collections?

Can you get approved for an FHA loan with collections on your credit report? I make a good income but my credit score is low due to several accounts in collection and want to know if I can qualify for a mortgage.

Michael Jensen, Mortgage and Finance Guru
, Mortgage and Finance Guru

Based on the information you provided, the FHA Mortgage Program may be your best option. The FHA Program enables you to qualify for a mortgage with a credit score as low as 500 if you make a down payment of at least 10% and a score as low as 580 if you make a down payment between 3.5% and 10%. We provide a comprehensive overview of the FHA Mortgage Program on FREEandCLEAR and you can use our FHA Mortgage Qualification Calculator to determine what size FHA loan you can afford based on your monthly gross income, debt payments and mortgage rate.

Another advantage of the FHA Mortgage Program is that you may also be able to qualify for a mortgage with accounts in collection. If an applicant has debt accounts in collection totaling $2,000 or more, you have the following options to address the issue:

1) Payoff the debt in full before your mortgage closes.

2) Settle the account with the creditor and include any monthly settlement payments in your debt-to-income ratio. In short, your debt-to-income ratio is the amount of your monthly gross income that you can spend on debt expenses including your mortgage payment, property tax, homeowners insurance, mortgage insurance as well as credit card, car and student loans. The higher your monthly debt expenses, including payments for accounts in collection, the lower the mortgage amount you can afford.

3) If the account is not settled and a payment arrangement has not been made, the lender includes 5% of the outstanding debt balance in your debt-to-income ratio. For example, if you have $2,500 in total accounts in collection, the lender adds $125 to your debt-to-income ratio ($2,500 * 5% = $125).

Additionally, if you have a collection on your credit report, mortgage lenders want to understand when the collection occurred, the type and amount of the collection and if the collection has been settled. Some lenders may be more flexible with a collection that occurred several years ago even if it only recently showed up on your credit report. Additionally, collections related to medical care or other special circumstances may be treated more favorably and are usually excluded by lenders. In all cases, borrowers should provide a written summary of the collection with an explanation of why it happened and what steps you took to resolve the issue. If you have not experienced any other collections or adverse credit issues you should also note that information in your written summary.

Please note that your credit score is only one factor that lenders consider when you apply for a mortgage. Lenders also review your debt-to-income ratio, employment history and other borrower qualification guidelines to determine your ability to qualify for a mortgage. Depending on these other qualification factors, you may be able to qualify for an FHA loan.

I recommend that you contact multiple lenders to understand how they would handle your unique situation. You can review FHA lenders in your area by clicking FHA MORTGAGE RATES We advise you to contact at least four lenders as qualification guidelines vary. Plus, shopping multiple lenders is the best way to save money on your mortgage.

You may also want to consider the NACA Mortgage Program. NACA is a not-for-profit organization that offers mortgage programs designed to make home ownership more attainable. The NACA Mortgage Program enables borrowers to purchase a home with no down payment and no closing costs and uses a character-based borrower credit review process instead focusing on your credit score. We provide a detailed overview of the NACA Mortgage Program on FREEandCLEAR and you can contact NACA by visiting the NACA web site.

Finally, we provide an overview of How to Improve Your Credit Score Before You Apply for a Mortgage and How to Get a Mortgage with Bad Credit on FREEandCLEAR. Reviewing these resources will help you understand your options and make more informed decisions when you get a mortgage.

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About the author

Michael Jensen, Mortgage and Finance Guru

Michael is the co-founder of FREEandCLEAR. Michael possesses extensive knowledge about mortgages and finance and has been writing about mortgages for nearly a decade. His work has been featured in leading national and industry publications. More about Michael

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