Medical collections scare many buyers into thinking an FHA loan is off the table, and for most of them that fear is overblown. This guide walks you through medical debt mortgage approval on an FHA loan, from sorting your credit report to finishing with a clean documentation file and a realistic monthly payment. Before you start, gather your credit reports, two years of income documents (W-2s, tax returns, recent pay stubs), and every collection notice or payment-plan letter you have received.
Step 1: Pull Your Credit Reports and Sort Every Medical Item
Get all three reports free at annualcreditreport.com, the federally authorized source. Build a simple list with one line per account: creditor or collection agency, balance, date of first delinquency (the date you first fell behind, which controls how long the item can be reported), and status (open, paid, disputed).
Then split the list into three groups: medical collections, non-medical collections, and charge-offs or other derogatory accounts. FHA underwriting treats medical collections differently from the others, so mixing them up will give you a wrong picture of your file.
Next, audit for errors. Look for:
- Balances that do not match your statements or explanation of benefits.
- The same bill appearing twice, once under the provider and once under a collection agency.
- Bills your insurance should have paid, which sometimes land in collections because of a billing or coding error.
- Accounts with a first-delinquency date that looks wrong.
Reporting rules have shifted recently, so confirm them before you rely on them. The three national bureaus announced in 2022 and 2023 that paid medical collections would come off reports and that unpaid medical collections would not appear until a year after they go to collections, with small balances (under $500) not reported. The CFPB finalized a rule in January 2025 that would have barred medical debt from credit reports, but a federal court vacated it in 2025. As of October 2026, check the CFPB’s medical debt pages at consumerfinance.gov and each bureau’s policy for the current status, since this area is still moving.
Step 2: Learn How FHA Underwriting Treats Medical Collections
HUD Handbook 4000.1, the rulebook FHA loans follow, carves medical collections out of the collection-account rules. Borrowers are not required to pay off medical collection accounts, and medical collections are excluded from the balance test that applies to non-medical collections. Read the collections provisions in Section II.A of the handbook at hud.gov and confirm the current version, because HUD updates it periodically.
Two review paths matter here. Automated underwriting (AUS) runs your file through software that returns an approval recommendation. Manual underwriting means a person applies the handbook’s rules line by line, usually with stricter limits on debt ratios and reserves. Medical collections generally do not need the same explanation as other derogatory credit, but how your specific file will be reviewed depends on the findings. Duane Buziak can tell you which path your file is likely to take before you spend anything.
Two misconceptions cost borrowers money:
- “Everything must be paid before closing.” Not for medical collections under FHA guidelines.
- “Paying a collection always raises my score.” Not always. Depending on the scoring model, paying an old collection can change how it reports, and a payment on a very old account can sometimes make it look recent. Paying also pulls cash you may need for your down payment and closing.
The practical rule: do not pay, settle, or sign anything on a medical collection until you have talked it through with your loan professional.
Step 3: Check Your Credit Score Against FHA Minimums
FHA’s published score tiers, per HUD guidelines (verify the current rules at hud.gov; this is the structure as of October 2026):
- 580 and above: eligible for the minimum 3.5% down payment.
- 500 to 579: eligible with at least 10% down.
- Below 500: not eligible.
Individual lenders can set higher floors than HUD, called overlays. A 580 score may be fine under HUD’s rules and still be declined by a lender that requires 620. This is one of the biggest reasons to work with a broker who can see many lenders’ guidelines.
Medical collections can drag your score down, but the effect varies widely by scoring model and by how many other negative items you have. A 20-point swing can matter at the 580 line, because it separates 3.5% down from 10% down. Smaller changes affect your rate through pricing tiers rather than eligibility.
Do not try to move your score by paying collections on your own. A well-meant payment can change reporting in ways you did not intend. Duane Buziak offers a NoTouch Credit Pull, a soft pull that does not create a hard inquiry, so he can review your file at the start without dinging your score. Confirm current availability and terms when you reach out.
Step 4: Decide What to Do With Each Medical Debt
Work through your list from Step 1 and assign each item one of three outcomes.
Leave it
If the debt is accurate, FHA does not require you to pay it, and paying it would not help your approval, leaving it alone is often the right call. This is common for older or smaller medical collections.
Dispute it
If the balance is wrong, the bill is a duplicate, or insurance should have covered it, dispute it in writing with the bureau and the collector. Keep copies and dates. A disputed item can change how it is treated in underwriting, so ask your loan professional before filing during an active application.
Negotiate
You can offer a settlement or ask for a pay-for-delete, where the collector agrees to remove the item after payment. Collectors are not obligated to agree, and many will not. If one does, get the terms in writing before you send a dollar, including that the account will be deleted or reported as paid.
Active payment plans need a separate check. A monthly plan payment may be counted in your debt-to-income ratio, depending on the plan and how the file is reviewed. Ask how yours will be treated and bring the signed agreement.
The mistake to avoid is draining your down payment or reserves to clear a collection underwriting would not have required you to pay. Cash in the bank at closing helps your file more than a zero balance on an account that was excluded anyway.
Step 5: Calculate DTI and the Real Monthly Cost With Medical Payments Included
Debt-to-income (DTI) compares your monthly obligations to your gross monthly income. FHA’s baseline is commonly 31% for housing and 43% for total debt, and automated approvals can go higher with compensating factors such as reserves or strong income history. Confirm current limits in Handbook 4000.1 at hud.gov.
Here is an illustration, not a quote. Suppose you buy a $350,000 home in Henrico County with 3.5% down ($12,250). The base loan is $337,750. The upfront mortgage insurance premium (UFMIP) is 1.75%, or $5,910.63, financed into the loan for a total of $343,660.63. At an assumed 6.25% fixed rate over 30 years:
- Principal and interest: about $2,116
- Annual MIP at 0.55%: about $155 per month
- Property tax at Henrico’s $0.85 per $100 (henrico.us, as of October 2026; confirm before relying on it): $2,975 per year, about $248 per month
- Homeowners insurance (assumed): $120 per month
- Housing total: about $2,639 per month
Add a $150 medical payment plan and a $350 car payment, and total obligations are about $3,139. On $7,500 of gross monthly income, housing is about 35% and total DTI about 42%. Without the medical plan, total DTI is about 40%. Small payment plans can matter at the margin.
Insurance figures to verify at hud.gov: UFMIP is 1.75% (HUD Mortgagee Letter 2015-01). Annual MIP was reduced under Mortgagee Letter 2023-05, and the 0.55% rate applies to a 30-year loan up to $726,200 with a down payment under 5%. Other tiers differ by loan amount, term, and loan-to-value, so ask for your exact tier. The 2026 FHA floor limit for a one-unit home is $541,287 (Mortgagee Letter 2025-23), and Virginia county limits can be checked in HUD’s loan limit lookup.
Step 6: Assemble Your Documentation and Letters of Explanation
Underwriters move faster when the paper matches the credit report. Collect:
- Signed payment-plan agreements and proof of recent payments.
- Paid-in-full or settlement letters from collectors.
- Dispute results from the bureaus.
- Insurance statements or explanations of benefits showing a bill was resolved.
If you are asked for a letter of explanation, keep it short and factual: what happened (illness, accident, insurance dispute), roughly when, and what you did about it. Two or three paragraphs is plenty. The dates and amounts must agree with the bureau data, because a mismatch raises more questions than the debt itself. Do not editorialize or apologize at length.
While the file is in process, protect it:
- Do not open new credit cards, finance furniture, or lease a car.
- Avoid large, unexplained deposits. Any deposit that is not your regular pay needs a paper trail, such as a sale receipt or a gift letter.
- Keep paying every account on time, including medical payment plans.
Step 7: Get Pre-Approved and Compare Your Options
Apply with Duane Buziak, who is a mortgage broker rather than a single-shelf lender. That matters because one lender’s overlays can be stricter than HUD’s, and a collection that triggers a decline at one shop may be fine at another. Duane Buziak shops across 500+ wholesale lenders, and his Dare to Compare challenge invites you to bring any competing quote, whether from a large national company such as Rocket or Movement or a local one, and see how the pricing stacks up. Compare the full cost, not just the rate.
Duane Buziak is licensed in VA (his primary market), FL, TN, GA, and DC.
On why FHA suits blemished credit:
- FHA: 3.5% down at a 580 score, a medical collection exclusion in the handbook, and flexible DTI through AUS.
- Conventional: typically leans harder on score, with pricing that can worsen quickly as scores drop.
A useful pre-approval letter shows the loan program (FHA), the maximum purchase price, the down payment assumed, and that your credit and documents were reviewed rather than merely prequalified from a conversation. If you are denied, ask for the specific reason in writing, fix that item (a documentation gap, a score shortfall, a DTI overage), and reapply or have your broker re-shop the file.
Medical Debt and FHA Approval: Common Questions
Does FHA require me to pay off medical collections?
No. HUD Handbook 4000.1 does not require borrowers to pay medical collection accounts. Individual lender overlays can differ, so confirm for your file.
Do medical collections affect my credit score?
They can, depending on the scoring model, the balance, and whether the account is paid. Effects vary, so check your actual scores.
How old do medical collections need to be?
FHA does not set an age requirement for excluded medical collections. Reporting time limits come from credit reporting law and bureau policy.
Do payment plans count in DTI?
The monthly payment may be included in your DTI. Bring the signed agreement and ask how it will be counted.
Should I dispute a medical collection?
If it is wrong, yes. If it is accurate and not required to be paid, disputing during an application may not help, so ask first.
What is the minimum credit score for an FHA loan?
580 for 3.5% down, and 500 to 579 with 10% down under HUD guidelines. Some lenders require more.
Can I use gift funds for my down payment?
Yes, FHA allows gift funds from acceptable donors such as family members, with a signed gift letter and documented transfer.
How long does approval take?
A pre-approval can often be issued within days once documents are in. Full underwriting and closing typically take several weeks.
Before You Start House Hunting: Final Checks
Confirm these before you tour homes:
- All three credit reports reviewed, with errors disputed or flagged.
- Each medical item marked leave, dispute, or negotiate, with any agreement in writing.
- Down payment and reserves untouched by unnecessary collection payoffs.
- Payment plans and DTI reviewed with your broker.
- Documents and letters organized, and no new credit opened.
- A pre-approval letter in hand.
Ready to take the first step toward homeownership with an FHA loan tailored to your needs? Schedule your free consultation today and discover how our award-winning team can help you navigate the path to your new home with competitive rates and expert guidance. FHA Mortgages by Duane Buziak is a broker with access to 500+ wholesale lenders, a NoTouch Credit Pull (soft pull, no hard inquiry), the Dare to Compare pricing challenge, and no-out-of-pocket closing options. Call 804-212-8663 or visit 4860 Cox Rd, Glen Allen, VA 23060. Coast2Coast Mortgage LLC, NMLS #1110647, licensed in VA, FL, TN, GA, and DC.
