Updated August 1, 2026
One of the biggest myths in Kentucky home buying: “I have to pay off all my collections before I can get a mortgage.” Usually, you don’t. Here is what each loan program actually requires in 2026 — and the documentation that gets these files approved.
The FHA $2,000 Rule
FHA does not require collections to be paid off. If your cumulative non-medical collection balances are $2,000 or more, the lender must do one of three things:
- Verify the debt is paid in full at or before closing,
- Verify a payment arrangement with the creditor and count that payment in your debt-to-income ratio, or
- Count 5% of each collection’s outstanding balance as a monthly payment in your DTI — no payoff required.
Under $2,000 cumulative? Generally no action needed at all. Full details in our companion guide: repossessions and collections on an FHA loan.
Medical Collections Are Treated Differently
Medical collections are excluded from FHA’s $2,000 calculation, and since 2023 the credit bureaus no longer report paid medical collections or medical collections under $500 at all. If old medical bills are your main credit problem, your score may already be better than you think — pull a fresh report before assuming you can’t qualify.
Charge-Offs
A charge-off means the creditor wrote the debt off — it does not mean you’re disqualified. FHA generally does not require charge-offs to be paid and does not count them in your DTI. Underwriters will want a brief letter of explanation showing the cause is behind you, especially on manually underwritten files.
How Other Programs Handle Collections (2026)
| Program | General Approach |
|---|---|
| FHA | $2,000 rule above; medical excluded; charge-offs generally ignored |
| VA | No blanket payoff rule; unpaid judgments must be paid or under payment plan; overall credit picture matters |
| USDA | Follows automated underwriting findings; large open collections may need payment arrangements on manual underwrites |
| Conventional | For a 1-unit primary residence, automated underwriting frequently approves without paying off collections |
One thing that DOES usually have to be cleared: court judgments and federal debts (like defaulted student loans) generally must be paid, settled, or under a documented payment plan before closing on government loans.
Should You Pay Off Old Collections Before Applying?
Sometimes paying an old collection actually drops your score temporarily by making the account “recent.” Before you pay anything, have a lender run the numbers — the right move depends on the account’s age, size, and type. This five-minute review is free and can save you thousands.
Frequently Asked Questions
Do I have to pay off collections to get an FHA loan in Kentucky?
No. If cumulative non-medical collections are $2,000+, the lender can simply count 5% of the balances in your debt-to-income ratio instead of requiring payoff.
Do medical collections count against my FHA loan?
Medical collections are excluded from FHA’s $2,000 collection calculation, and paid or under-$500 medical collections no longer appear on credit reports.
Do charge-offs stop a mortgage approval?
Generally no on FHA — charge-offs typically don’t need to be paid and aren’t counted in DTI, though underwriters may ask for a letter of explanation.
What about judgments?
Court judgments generally must be paid, settled, or under a documented payment arrangement before closing on government-backed loans.
Get a Free Credit Review for Your Kentucky Mortgage
Don’t guess — send me your situation and I’ll tell you exactly what needs to be handled and what can be left alone. I work with FHA lenders that follow HUD guidelines without extra overlays. Call or text Joel Lobb at 502-905-3708 or email kentuckyloan@gmail.com.
Joel Lobb — Mortgage Loan Officer
NMLS #57916 | EVO Mortgage, Company NMLS #1738461
Equal Housing Lender.
Educational information only — not a commitment to lend and not complete underwriting guidelines. Program rules and lender overlays vary and can change. Not affiliated with FHA, VA, USDA, HUD, or any government agency.