Collections on your credit report affect your mortgage qualification, but the impact varies by loan type and the nature of the collection.
FHA: collections under ,000 may be ignored. Above ,000 may require a payment plan or proof of payment. Conventional: medical collections under 00 are ignored (as of 2022).
Non-medical collections: newer collections are more impactful than older ones. Older collections approaching 7 years have less impact.
FHA Rules
FHA: collections under K don't need to be paid. Collections over K: may need a payment agreement or payoff. FHA is generally more flexible with collections than conventional.
Conventional Rules
Conventional: paid medical collections are removed from credit reports. Unpaid medical under 00 is removed. Non-medical: may need to be paid or have a payment plan depending on size and age.
Medical vs Non-Medical
Medical collections: treated more leniently. Paid medical collections removed from reports. Unpaid medical under 00 also removed. Non-medical collections are still evaluated negatively.
Strategies
Strategy 1: if collection is small, pay it off. Strategy 2: if collection is large, set up a payment plan. Strategy 3: if collection is old (4+ years), it may be better to wait (7-year removal).
When to Pay vs Wait
Paying a collection updates the status to 'paid' but doesn't remove it. However, paid collections look better to underwriters than unpaid ones. A payment plan shows good faith.
Impact on Approval
Collections alone rarely prevent approval, especially with FHA. The bigger impact is on your credit score, which affects your rate and terms.