Do you have to pay collections and judgments to get an FHA loan?

by Gina Pogol
February 4th, 2011

Do you have debt skeletons in your financial closet? Will they come out to haunt you when you apply for FHA financing? Many Americans hit by the recent recession and perhaps with a stint of unemployment under their belts may find their credit reports a little worse for wear.

Fortunately, FHA underwriters are guided by rules that say a mortgage applicant’s overall pattern of payment is more important than a few isolated instances. Its handbook says,

When analyzing a borrower’s credit history, examine the overall pattern of credit behavior, rather than isolated occurrences of unsatisfactory or slow payments. A period of financial difficulty in the past does not necessarily make the risk unacceptable if the borrower has maintained a good payment record for a considerable time period since the difficulty. When delinquent accounts are revealed, the lender must document their analysis as to whether the late payments were based on a disregard for financial obligations, an inability to manage debt, or factors beyond the control of the borrower, including delayed mail delivery or disputes with creditors.

If your credit history shows years of  on-time payments, followed by several months of late payments, followed by a year of good behavior, and your credit scores fall within an acceptable range, you can probably get approved for a mortgage. But if an aggressive creditor took you to court during your unemployed days and obtained a judgment, or you have a couple of collection accounts, do you need to pay these obligations off before you can get an FHA mortgage?

Court-ordered judgments do have to be repaid before you can get an FHA mortgage in most cases, because in many states a successful plaintiff can place a lien on your property if you fail to make good on a judgment. In some jurisdictions, if you have been making regular payments as agreed to someone who won a judgment against you, you may be approved for an FHA home loan.

FHA does not require that collections be paid off as a condition of mortgage approval. However, your lender has the option of imposing stricter requirements. If that is an issue, have a conversation about it very early with your loan agent when you are shopping for your next FHA mortgage.

In any case, when applying for a mortgage, NEVER pay off old collections or charge-offs — that can worsen your credit score by turning an old event into a new one. If your lender wants a collection paid as a condition of funding your mortgage, you can pay it.

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