If you have a collection on your credit report or a judgment against you, you can still qualify for an FHA loan. Here's the rule that changes the conversation: FHA only requires the lender to address applicable non-medical collections when they total $2,000 or more, and if no payment arrangement exists, the lender adds 5% of the balance to your monthly debts. Medical collections don't even count toward that total (FHA Blog). A judgment must be resolved or documented before closing, but it doesn't end your chances.
The two words most Phoenix and Scottsdale buyers hear from lenders are "no," and I've spent the last fifteen years proving that answer is often wrong. I'm Virginia Fargo, an independent mortgage broker in Scottsdale. Every week I sit across from buyers who assumed their credit disqualified them, and from agents who assumed a client was unsellable. Most of the time, the deal can be saved.
This guide walks through how FHA actually treats collections, judgments, disputed accounts, and medical debt, so both buyers and the agents who represent them know which deals remain viable and what to do before going under contract. It also explains when paying a debt is the right call and when it would only drain the cash you need for closing.
How FHA Actually Treats Collection Accounts
Here is the rule that changes the conversation for most buyers: FHA looks at the cumulative balance of applicable collection accounts, and only requires the lender to address them when that total reaches $2,000 or more (FHA Blog). Below that threshold, the lender generally does not need to evaluate the accounts under this collection rule on their own. Your overall credit profile and the loan still have to satisfy FHA and the lender's underwriting, but the collection itself is not an automatic strike.
When your applicable collections do hit $2,000 or more, FHA gives the lender three ways to handle them. The one we use depends on your situation and on what will put you in the strongest position.
The first option is to pay the collection in full before or at closing, using an acceptable source of funds. The second is to set up a documented payment arrangement with the creditor. In that case, the monthly payment is included when we calculate your debt-to-income ratio, which is the share of your gross income that goes to debts each month. The third option applies when no payment arrangement is available: the lender calculates a monthly obligation at 5% of the outstanding balance of each applicable collection and adds that amount to your DTI (FHA Blog).
What the 5% Rule Means for Your Buying Power
A concrete example makes the math clear. Say a Phoenix first-time buyer has $4,000 in applicable collection balances and no payment arrangement in place. Under the 5% calculation, that works out to $4,000 x 5% = $200 per month added to the borrower's debt-to-income ratio (FHA Blog).
That $200 matters. It can reduce how much home you qualify for, because a higher debt-to-income ratio means less room in your budget for a mortgage payment. But notice what it does not do: it does not stop you from buying. The point of running the numbers is to know your real buying power before you start making offers, not after.
This is why I tell buyers to bring me their credit report and let me map it out before they ever open the search on a home. If a $4,000 collection costs you $200 a month of purchasing power, we may decide together to pay it, arrange a payment plan, or simply plan around the hit. All three are defensible. The difference between a smooth closing and a deal that falls apart is deciding which one before you're under contract.
Medical Collections Are Handled Differently
If some or all of your collection debt is medical, the picture changes. Medical collections are generally treated differently under FHA collection guidance and are not included in the cumulative collection balance used for this particular collection calculation (FHA Blog).
That is often the piece that makes a previously 'no' deal workable. A borrower whose only collections are medical can find the $2,000 threshold and the 5% math largely do not apply to them at all. Your full credit profile still gets reviewed, and every file is different, but medical debt not being swept into that collection balance is a genuinely valuable distinction. If you told yourself a medical bill ruined your chances, this is the rule that says otherwise.
Judgments Are Different, and Still Not Always a Deal-Breaker
A judgment is a court order saying you owe a specific sum to a creditor, and FHA treats it separately from a collection. A judgment does not automatically end your chances, but it must be resolved or properly documented before the loan can close (FHA Blog).
When a judgment shows up in a file, the first thing we do is map out the details: who owns the debt now, how much is owed, whether it's already been satisfied, whether the balance can be negotiated, and whether a Satisfaction of Judgment needs to be obtained or filed. The goal is to identify the problem before it becomes an emergency during underwriting.
Here is the warning I give every buyer and agent in Maricopa County. The worst time to discover a judgment is after you've found a home and signed a purchase contract. Arizona has several court systems, and a single online search may not catch everything. If you are preparing to buy, search your name through the Arizona Judicial Branch Public Access system and the Maricopa County Justice Courts case search, then verify anything you find with the court where the case was filed (FHA Blog). For a step-by-step walkthrough of these searches plus direct links to the Arizona court portals, see my Phoenix & Scottsdale first-time homebuyer guide on buying with collections and judgments.
Don't Pay That Collection Just Yet
This is the single most important thing I want Phoenix-area buyers to understand: don't automatically start paying collections just because they're on your credit report (FHA Blog). It sounds counterintuitive, but paying the wrong debt at the wrong time can hurt your file and drain the cash you need for closing.
Before you spend a dollar, we work through a short list. Does this collection actually need to be paid? Can it stay unpaid? Does FHA require a payment to be included in your debt-to-income ratio? Would a payment arrangement help more than a payoff? Would paying it reduce the cash you have available to close? Do we need documentation from the collection company, and are there disputed accounts that also need attention?
The goal is not to clear every old debt out of a sense of guilt. It is to create the most efficient path to approval. Sometimes that means paying. Sometimes it means a payment plan. Sometimes it means leaving it alone entirely. The right answer is the one that gets you to closing with your down payment intact.
What About Disputed Accounts?
Disputed accounts deserve their own attention, because FHA underwriting can treat them carefully. When an account on your credit report is in dispute, the automated underwriting system and the lender may require verification and documentation before the account is resolved. The point is to deal with disputes openly and early, not to hope they pass unnoticed.
A dispute is not the same as a refusal. It can be the start of the conversation about whether a balance is really yours. But it has to be handled in a way that lets underwriting close the file, which is why having a professional review the situation before you apply matters more than trying to handle it alone.
For Agents: Which Buyers Are Still Viable
If you're a real estate agent, the practical question is simpler: which clients can I actually put under contract? The answer is more buyers than you'd think. A client with collections under the $2,000 threshold, with medical collections, or with a collection that can be handled through one of the three FHA options is often very much alive. The buyer with a low credit score but stable income is often the one who most needs a lender who knows the system.
The risk you face is the opposite. You lose a deal not because the buyer can't qualify, but because the buyer's lender ran the credit report, saw a collection, and said no without checking FHA's actual rules. That client walks away discouraged, and the listing goes to another buyer. When a buyer tells me a lender already turned them down, my first move is to find out why. Often the reason was a guideline applied more strictly than FHA requires.
1Should I pay off collections before I apply?
Not yet. FHA only requires the lender to address applicable non-medical collections when they total $2,000 or more, and paying the wrong debt at the wrong time can drain the cash you need for closing. Bring us your credit report first, and we'll map out whether paying, setting up a payment arrangement, or leaving it alone gets you to closing cleanest.
2Do I need to pay all my collections, even medical ones?
Yes, but only the ones FHA counts. Medical collections generally aren't included in the collection balance used for this calculation, so they don't push you toward the $2,000 threshold. Non-medical collections that stay under that combined total usually don't need to be paid, either.
3How do I check for judgments in Maricopa County?
Search your name through the Arizona Judicial Branch Public Access system and the Maricopa County Justice Courts case search, then verify anything you find with the court where the case was filed. Do this before you make an offer, not after you're under contract.
4Can I do anything about a judgment that's already on record?
You generally can't undo a judgment that's already been entered, but the balance can often be negotiated, and a satisfied or documented judgment doesn't automatically disqualify you. The goal is to resolve it or document it properly before the loan can close.
The Takeaway: Plan Before You Promise
Whether you're a buyer or an agent, the same lesson applies. The time to sort out your credit is before you're under contract, not after. A collection that costs you $200 a month of buying power is manageable if you know about it early. A judgment discovered in underwriting is a crisis. A medical collection that doesn't count toward FHA's threshold is good news you want to learn before the offer, not after.
Every approval depends on individual circumstances and the lender's underwriting, so no two files look identical. That's the honest answer, and it's exactly why the work happens up front. I've spent fifteen years building my reputation on getting the deals done that other lenders decline, and on telling buyers the truth about what their credit means and what it doesn't.
If you're ready to find out where you stand, book a time with me here: Schedule a no-pressure call.
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Virginia Fargo, providing No Hassle Home Loans, the trusted mortgage consultant, home loan advisor in Scottsdale & Across Maricopa County, the leading mortgage broker dedicated to helping consumers save money specializing in home loans, first-time homebuyers, relocation, affordability and self-employed borrower financing.
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