Can I get a conventional loan with collections?
Often, yes. For a Fannie Mae loan run through its automated system (DU) on a one-unit home you will live in, Fannie Mae does not require you to pay off collections before closing. Payoff limits apply to 2 to 4 unit homes, second homes and rentals, and medical collections are left out of those limits. A lender can still add stricter rules.
Educational answer from Mortgage Expert. Mortgage Expert's licensed loan originator is Shahram Sondi, Florida mortgage broker, Certified Mortgage Advisor™, NMLS 186790. Sources checked .
How it works
What Fannie Mae's DU rule says
A collection is a debt a creditor sent to a collection agency. A charge-off is a debt the creditor wrote off. Both show up on your credit report and can affect your score.
For loans run through DU, Fannie Mae's payoff rule depends on the home. On a one-unit home that will be your main residence, you are not required to pay off collections or non-mortgage charge-offs. If the lender marks a collection to be paid at closing, DU will then expect it to be paid.
On a 2 to 4 unit home you will live in, or on a second home, collections and charge-offs that total more than $5,000 must be paid in full at or before closing.
On a rental (investment) property, each account of $250 or more must be paid, and so must accounts that total more than $1,000.
Past-due accounts are different. An account that is still open and behind must be brought current.
Medical and disputed accounts
Medical collections are left out of these payoff limits. They do not have to be paid at or before closing under this rule.
Disputed accounts get a separate check. DU first scores the file with the disputed accounts included. If that still comes back as an approval, nothing more is needed. If not, DU scores it again without them, and the lender must look into whether the debts are yours. If they are yours and the report is accurate, the loan cannot go through as a DU loan, though it may be underwritten by hand if eligible. Payments on disputed accounts that are yours still count in your debts.
Where stricter rules come from
These are Fannie Mae's rules for DU loans. A lender may add its own overlay, such as asking you to pay certain collections anyway. Loans underwritten by hand have their own review. Freddie Mac also has its own guide.
Even when payoff is not required, collections can lower your score and affect how DU weighs the file.
Same collections, three kinds of homes
Illustrative example. Not a real borrower, offer or quote. It shows how Fannie Mae's DU payoff limits apply, not whether a loan would be approved.
A buyer has two non-medical collections, one for $300 and one for $900, and one medical collection for $1,500. Assume a Fannie Mae loan run through DU with no lender overlay and no disputed accounts. Fannie Mae's limits are a total over $5,000 for a second home, and each account of $250 or more or a total over $1,000 for a rental. The table shows what Fannie Mae's rule requires for three kinds of homes.
| Home | Fannie Mae limit | Payoff required? |
|---|---|---|
| One-unit home to live in | No payoff required | No |
| Second home | Total over $5,000 | No ($1,200 counted) |
| Rental property | Each $250 or more; total over $1,000 | Yes, $1,200 |
The math, step by step
- Count only the non-medical collections: $300 + $900 = $1,200. The $1,500 medical collection is left out.
- Second home: $1,200 is not more than $5,000, so payoff is not required by Fannie Mae.
- Rental: both accounts are $250 or more, and the total is $1,200 − $1,000 = $200 over the $1,000 limit. Both must be paid at or before closing.
Takeaway: The same credit report can mean no payoff for a home you live in and a $1,200 payoff for a rental. Ask the lender whether any payoff it asks for is Fannie Mae's rule or its own.
Easy things to get wrong
- Paying an old collection can be a choice, not a requirement. Ask the lender whether it is needed for approval before you pay it.
- Money used to pay collections at closing has to come from funds you can document, the same as your down payment.
- Disputing accounts right before you apply can slow the file down. The lender may have to investigate each one.
- Collections and charge-offs are not the same as a past-due open account. An open account that is behind must be brought current.
What to do next
List each collection on your report, mark which are medical, and add up the rest. Then compare how FHA treats the same accounts.
Not sure whether a collection on your report has to be paid before closing? Shahram Sondi can review the accounts and the type of home and explain what the rules require.
Check the sources
- Fannie Mae Selling Guide B3-5.3-09: DU credit report analysis
- Fannie Mae Selling Guide B3-5.1-01: credit score requirements
Sources checked . Program guidance and lender requirements can change.
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Educational only. Conventional loan guidelines, lender overlays, rates, fees, PMI, LLPAs, and underwriting requirements can change. Final eligibility depends on full underwriting review. Mortgage Expert, Inc. is not affiliated with Fannie Mae, Freddie Mac, FHFA, or any government agency.
