Can a Collection Prevent Me from Getting a Mortgage?

If an individual has one or several collections, underwriting will usually count 5% of the total collection amount. For example, if there is a $1000 utility collection, 5% is $50 per month accounted as a liability; if there is a $2000 collection for a personal loan which was not paid, 5% of the amount is $100, and this would be counted as a monthly debt; $5000 open collection for a car loan which was not paid translates into $250 per month as a monthly debt which is counted as a liability.

In some cases, the amount is rather small and if the credit is overall reasonable, this may not have a big impact. On the other hand, if the credit was mediocre to begin with, and then add in a few collections, the score can drop and these monthly debts that have to factored in could require some resolution before proceeding.

When it's a medical bill, the calculation used above would usually not be applicable. The underwriter will see the collection, but will not count against the borrower who is trying to purchase or refinance the home. But, keep in mind, that if the credit was mediocre or poor to begin with, having the medical collections can lower the scores further and create other obstacles that have to be reviewed beforehand.

How Collections Affect Mortgage Approval

The impact of a collection on your mortgage approval will also depend on the type of loan you’re applying for. Government-backed loans such as FHA, VA, and USDA loans often have different guidelines than conventional mortgages.

For example, FHA loans allow for certain collections, especially if the total outstanding balance is below a specific threshold. However, if the cumulative balance of all non-medical collections is above that threshold, a mortgage underwriter may require the debt to be paid off or documented before closing. VA loans tend to be more flexible focusing more on your overall ability to repay the loan rather than rigid rules about past collections. Conventional loans, which are not backed by a government agency, often have stricter credit requirements. A recent collection account, even if it has a small balance, might lead a lender to deny the application or offer less favorable terms.

Another aspect lenders consider is whether the collection account is paid or unpaid. While having a paid collection doesn’t completely erase its impact, it does show initiative and responsibility, which can help strengthen your application. An unpaid collection, especially if it's recent or significant in size, poses a greater risk to lenders and could prevent approval entirely.

Credit Scores and Collections

Your credit score plays a central role in mortgage qualification. Collections typically lower your score, and the drop can be substantial depending on how recent the collection is and how much was owed. Most lenders have minimum credit score requirements, and if a collection has dragged your score below that threshold, you may need to take steps to repair your credit before applying.

It’s worth noting that not all lenders use the same credit scoring model. Some may use newer models that weigh collections differently, particularly those that de-emphasize or exclude paid medical debts. Even in those cases, an underwriter may still look at the full credit report during manual underwriting, and the presence of collections will still be visible.