Yes, you can get a mortgage with charge-offs on your credit report. FHA, VA, USDA, and conventional loans all allow it, and most don’t require the charged-off debts to be paid off before closing. What matters more is the loan program you choose, whether the account has moved into collections, the type of property you’re buying, and how recent the charge-off is.
FHA Loans and Charge-Offs
Under the FHA Single Family Housing Policy Handbook, charge-off accounts do not need to be included in your liabilities or your debt-to-income ratio.1HUD.gov. FHA Single Family Housing Policy Handbook – Section II.A.4.d.(N) There is no dollar threshold that forces you to pay them off, and no requirement to set up a payment plan on a charge-off before closing.
The widely cited $2,000 rule is a different rule, and it applies to collection accounts, not charge-offs. Once a creditor sells your debt to a collector or refers it for collection, that account is reported as a collection and FHA’s collection rules kick in. If your cumulative non-medical collection balances reach $2,000 or more, the lender must do one of three things: verify the debt is paid in full before closing, confirm you have a payment arrangement in place and include that payment in your DTI, or calculate a monthly payment at 5% of the outstanding balance and add it to your ratio.2HUD.gov. FHA Single Family Housing Policy Handbook – Section II.A.4.d.(M) Medical collections are excluded from this calculation.
So check your credit report carefully. If the original creditor charged off the account but it was never sold or referred to a collector, FHA essentially sets it aside for DTI purposes. If a collection account also appears, you’re in the $2,000 territory.
FHA’s credit score floor is 500, with 580 required for the standard 3.5% down payment. A score between 500 and 579 caps you at 90% loan-to-value, meaning 10% down.3U.S. Department of Housing and Urban Development. Does FHA Require a Minimum Credit Score and How Is It Determined
Conventional Loans
For a conventional loan on a single-unit primary residence, Fannie Mae does not require charge-off accounts to be paid off as a condition of approval.4Fannie Mae. DU Credit Report Analysis Desktop Underwriter weighs the charge-off as part of your overall credit profile, but won’t issue a condition forcing payoff for a standard single-family purchase.
The rules tighten with other property types:
- Two- to four-unit properties and second homes: non-mortgage charge-offs totaling more than $5,000 must be paid in full before or at closing.
- Investment properties: individual non-mortgage charge-offs of $250 or more, or total charge-offs exceeding $1,000, must be paid in full before or at closing.4Fannie Mae. DU Credit Report Analysis
Fannie Mae’s minimum credit score is 620 for manually underwritten fixed-rate loans and 640 for adjustable-rate loans. Loans run through Desktop Underwriter don’t have a hard score floor, but DU evaluates creditworthiness against Fannie Mae’s risk models, and charge-offs are part of that assessment.5Fannie Mae. General Requirements for Credit Scores
VA and USDA Loans
Both programs take the most lenient approach to charge-offs among the major loan types.
The VA does not require charge-offs or collection accounts to be paid off. If the veteran has been making steady payments under a repayment plan, that’s a positive factor. Paying old charge-offs off at the last minute carries little weight: VA guidance states that doing so “does not alter the unsatisfactory credit.”6VA Home Loans. VA Credit Standards – Unpaid Obligations What underwriters look for is whether you’ve re-established responsible credit use since the charge-off.
USDA Rural Development loans follow a similar path. Charge-off accounts do not need to be paid, and no specific dollar threshold triggers a payoff. If you’re on a repayment plan for a charged-off debt, the lender must count that monthly payment in your DTI. Otherwise, the underwriter reviews the charge-off in the context of your overall credit picture.7USDA Rural Development. HB-1-3555 Chapter 10 Credit Analysis
A Charged-Off Mortgage Is Different
Everything above covers non-mortgage charge-offs like credit cards, medical bills, and personal loans. A charged-off mortgage is treated more seriously because it shows the borrower defaulted on the same type of obligation they’re asking for again.
Fannie Mae treats a mortgage charge-off the same as a foreclosure or short sale for waiting periods. You must wait four years from completion of the charge-off before you’re eligible for a new conventional loan. If the charge-off resulted from extenuating circumstances (nonrecurring events beyond your control that caused a sudden, significant, and prolonged drop in income or a catastrophic spike in financial obligations), the waiting period drops to two years.8Fannie Mae. Prior Derogatory Credit Event – Borrower Eligibility Fact Sheet A current mortgage that is 60 or more days past due within the last 12 months makes you ineligible for a Fannie Mae loan.4Fannie Mae. DU Credit Report Analysis
Risks to Check Before You Apply
Two legal issues sit behind every charge-off and can derail a mortgage in ways credit scores don’t signal.
The first is the statute of limitations on debt collection lawsuits. In most states, creditors have between three and six years to sue over an unpaid debt, though some states allow longer. Once that window closes, a lawsuit would violate the Fair Debt Collection Practices Act. The trap: in many states, making even a partial payment on an old charge-off can restart the statute of limitations and give the creditor a fresh window to sue.9Consumer Financial Protection Bureau. Can Debt Collectors Collect a Debt Thats Several Years Old Think twice before any goodwill payment on a very old account.
The second is judgment liens. If a creditor sued you over a charged-off debt and won before the statute of limitations ran, that judgment can attach as a lien to real property you own in the county where it’s recorded. A title search during the mortgage process will find it, and no lender will fund on a property with an unresolved lien. If you know a creditor obtained a judgment, resolve it early rather than discovering it during underwriting.
The Tax Hit If You Settle Before Closing
If you negotiate a settlement and the creditor forgives part of what you owed, the IRS treats the forgiven portion as taxable income. Any creditor that cancels $600 or more of debt is required to file a Form 1099-C reporting it to you and the IRS.10Internal Revenue Service. Instructions for Forms 1099-A and 1099-C You’re required to report canceled debt as income even if you never receive a 1099-C.11Internal Revenue Service. Publication 4681 – Canceled Debts, Foreclosures, Repossessions, and Abandonments The federal tax code lists discharge of indebtedness explicitly as a component of gross income.12Office of the Law Revision Counsel. 26 USC 61 – Gross Income Defined
There is an escape valve. If your total liabilities exceeded the fair market value of your total assets immediately before the debt was canceled, you were insolvent, and you can exclude the forgiven amount from income up to the extent of your insolvency. You claim this by filing Form 982 with your tax return.13Internal Revenue Service. Instructions for Form 982 Many borrowers with charge-offs qualify without realizing it, so run the numbers before you file.
Documents to Have Ready
Expect extra scrutiny on a file that includes charge-offs. Having these ready up front prevents the delays that kill deals:
- A brief, factual letter of explanation describing what caused the charge-off and when: job loss, medical event, divorce. Keep it to facts.
- Recent statements from the original creditor or current debt holder showing balance and date of last payment.
- If you settled, the written settlement agreement and proof of payment.
- If you’re on a repayment plan, at least three months of bank statements or canceled checks showing the payments.
If a charge-off resulted from identity theft, you’ll also need a police report, a completed identity theft affidavit, and evidence you’ve disputed the account with the credit bureaus and the furnisher.
What To Expect During Underwriting
Your file typically runs through an automated underwriting system first: Desktop Underwriter for Fannie Mae loans or GUS for USDA. If the system approves it, the findings may include conditions to document the charge-offs, but for a standard single-family primary residence they probably won’t require you to pay them off.
If the automated system can’t approve the file, it issues a referral for manual underwriting. A human underwriter then reviews your full credit history, reads your letter of explanation, and weighs the charge-offs against your current stability. For FHA manual underwriting, the underwriter can exclude charge-offs from DTI, but each outstanding charge-off needs a letter of explanation with supporting documentation. Compensating factors like cash reserves or a low payment-to-income ratio help with borderline DTI, but they don’t erase the charge-off’s presence.
Approvals often come with conditions to clear before funding: updated account statements, a specific balance paid at closing, or extra explanation of recent derogatory accounts. Denials tend to cluster around recent charge-offs, new delinquencies that appeared after the original default, or a debt load that leaves no cushion.