FHA loans · HUD Handbook 4000.1FHA collections and judgments: the $2,000 rule, the 5% payment and judgment plans

FHA treats derogatory accounts differently from conventional loans. For loans scored by TOTAL Mortgage Scorecard, HUD Handbook 4000.1 doesn't require an explanation of collection accounts, charge-offs, late payments or judgments. But if the credit reports show cumulative collection balances of $2,000 or more, the lender must do one of three things: verify the debts are paid in full at or before settlement with acceptable funds; verify a payment arrangement with the creditor and include that payment in the debt-to-income ratio; or, if no arrangement is available, count 5% of each collection's outstanding balance as a monthly payment in the DTI. In community property states, a non-borrowing spouse's collections count toward the $2,000 unless state law excludes them. Charge-off accounts don't have to be included in the borrower's liabilities, and medical collections aren't considered debt. Court-ordered judgments must be resolved or paid off at or before closing; a judgment counts as resolved if the borrower has a valid agreement with the creditor, has made at least three months of scheduled payments on time – prepaying doesn't count – and the judgment won't take priority over the FHA mortgage, with the payment included in the DTI. Disputed derogatory accounts – disputed collections, charge-offs or recent late payments – totaling $1,000 or more send the loan to manual underwriting, excluding disputed medical accounts and accounts from documented identity theft or unauthorized use.