How Collections & Charge‑Offs Affect an FHA Mortgage
1. Medical vs. Non‑Medical Collections
- Medical collections/charge‑offs:
- Ignored for FHA qualifying
- No 5% rule
- Only impact your credit score, not your DTI
- Non‑medical collections/charge‑offs:
- FHA requires lenders to count 5% of the balance as a monthly debt
- Applies whether the loan is DU, LP, or manual underwrite
✅ The 5% Rule (The Big Change)
FHA does not require you to pay off collections. But they do require lenders to use this formula:
Example
You have a $3,000 credit card collection:
So FHA forces lenders to count $150/month in your DTI—even though you’re not actually paying it.
This can:
- Push your DTI too high
- Cause DU/LP to deny
- Make manual underwriting impossible
- Stop your FHA approval entirely
✅ Why This Matters
Most lenders cap FHA DTI around:
- 45–50%
But FHA technically allows:
- 46.9% front-end / 56.9% back-end
If your lender doesn’t go that high, the 5% rule can block your approval even if you qualify under FHA’s true guidelines.
✅ How Barclay Butler Financial Helps
(Barclay Butler Financial) allows:
- 46.9% / 56.9% DTI These are the maximum FHA‑allowed ratios, giving borrowers with collections a much better chance of approval.
Most banks, mortgage banks, and brokers:
- Cap at 45–50%
- Decline loans FHA would actually allow
✅ When Borrowers Should Be Concerned
A borrower should pay attention if they have:
- $2,000+ in non‑medical collections
- Multiple charge‑offs
- Old credit card or personal loan collections
- High existing monthly debts
Even if their credit score is fine, the DTI hit can block approval.
📌 Bottom Line
Collections and charge‑offs don’t have to be paid, but they can absolutely stop an FHA mortgage because of the 5% DTI rule. Medical collections are exempt. Working with a lender who allows the full FHA DTI limits—like Barclay Butler Financial—can make the difference between approval and denial.
Why Choose Us?
Barclay Butler Financial specializes in helping customers become homeowners. We’ll guide you step-by-step to make the process simple and stress-free.
Call/Text: 224-420-9990
Email: bbutler@barclaybutlerfinancial.com
Website: www.barclaybutlerfinancial.com
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