Quick answer: A charge-off does not automatically disqualify you from an FHA loan. HUD generally does not require non-mortgage charged-off accounts to be paid before closing, but the account can lower your score, push a file into manual underwriting, and trigger stricter lender rules. The charge-off mortgage impact depends on your score tier, your debt-to-income ratio, and the lender.
The charge-off mortgage impact on an FHA application comes down to three things: what your score does, how the file is underwritten, and which lender reviews it. HUD sets a federal floor for FHA credit, and many lenders add stricter rules on top. That is why one borrower with a charged-off credit card can be approved by one lender and declined by another.
This article separates what HUD requires from what lenders add, then shows the dollar effect on a real monthly payment. Duane Buziak, a mortgage broker who specializes in FHA purchase mortgages, uses the same approach when he reviews a file with derogatory credit: understand the account, understand the rules, then choose the lender whose guidelines fit.
What a Charge-Off Is and Why It Still Counts After the Lender Writes It Off
A charge-off is an accounting decision by the original creditor. After a long period of nonpayment, typically around 180 days on revolving accounts under standard industry practice, the creditor stops treating the balance as an asset and records it as a loss. The Consumer Financial Protection Bureau publishes plain-language guidance on how negative items appear on credit reports.
The key point: the debt is still owed. A charge-off is not forgiveness. The creditor can keep collecting, sell the account to a debt buyer, or assign it to a collection agency, and a lawsuit remains possible depending on your state’s rules and the statute of limitations.
Charge-off, collection, settled, and paid
These terms describe different things, and they often appear together on one report.
- Charge-off: the original creditor’s write-off. It appears as a derogatory tradeline.
- Collection: a separate account, opened when the debt is sold or placed with a collector. One debt can show up as both a charge-off and a collection.
- Settled: you paid less than the full balance and the creditor agreed to close the matter.
- Paid: the balance is zero. The tradeline status changes, but the late payment history and the charge-off notation generally remain.
A derogatory account is any account reporting serious late payments, a charge-off, a collection, or a judgment. Underwriters look at all of them, but not all are treated the same.
How long it stays
Under the Fair Credit Reporting Act, most negative items can remain on a credit report for up to seven years from the date of first delinquency, the missed payment that led to the charge-off. Paying the account does not restart that clock, and the item does not disappear the day you pay it. Because the clock runs from the first delinquency, a charge-off that is a few years old is already part-way through its reporting period, and its weight in underwriting generally fades as the date recedes and newer on-time payments build up.
How FHA Underwriting Treats a Charged-Off Account
HUD Single Family Housing Policy Handbook 4000.1 requires the underwriter to evaluate your credit history as a whole: the pattern, the cause, and the recency. It does not tell lenders to reject a file because a charge-off exists. The credit analysis provisions are in Section II.A.4 of the handbook, which HUD updates periodically, so the current text should be checked before you rely on any detail here (reviewed as of October 2026).
What HUD does and does not require you to pay
The handbook draws a line between categories. Federal delinquent debt, tax liens, and court-ordered judgments generally have to be resolved or placed on an approved arrangement before closing. Non-mortgage charged-off accounts, by contrast, are generally not required to be paid off to qualify. Collection accounts follow their own rules: for manually underwritten files, the handbook sets a cumulative balance threshold (historically $2,000) above which the lender must document a payment arrangement or payoff. A charged-off mortgage account is a different matter and gets closer scrutiny.
AUS findings drive the documentation
Most FHA files run first through an automated underwriting system, FHA’s TOTAL Scorecard. An Approve/Eligible finding means the file can generally proceed with standard documentation. A Refer finding means the scorecard could not approve it, and the lender must underwrite the file by hand.
Manual underwriting
Manual underwriting is a human review against handbook standards. Debt-to-income (DTI) limits are tighter: the baseline is 31% housing and 43% total, and the handbook permits higher ratios only with documented compensating factors, such as verified cash reserves, a low payment shock, or a long and stable employment history. Check the current handbook matrix for the exact ratios that apply to your score tier. A recent charge-off is one of the more common reasons a file lands here.
Overlays
An overlay is a lender rule stricter than HUD’s. A lender might require a minimum score above 580, refuse manually underwritten files altogether, or ask for a charge-off to be paid regardless of the handbook. The loan is still FHA-insured; the lender’s appetite is what differs. This is the main reason the same file can get opposite answers from two lenders.
Credit Score Tiers: Where a Charge-Off Can Land You
HUD’s published minimums, from Handbook 4000.1 (verified as of October 2026; confirm at hud.gov):
- 580 and above: eligible for maximum financing, which means a 3.5% minimum down payment.
- 500 to 579: eligible with a 10% minimum down payment. Availability depends on the lender, and many do not offer it.
- Below 500: not eligible for FHA-insured financing.
Lenders generally use the middle of three bureau scores. If two borrowers apply together, the handbook directs lenders to use the lower of the two borrowers’ middle scores.
What a charge-off does to the score
A newly reported charge-off usually lowers a score, and the drop tends to be larger for borrowers who had clean files beforehand, because they have further to fall. Published point-drop figures vary by scoring model and profile, so this article does not quote one. What matters is that the score you see on a free app may differ from the mortgage scores a lender pulls, so do not assume your tier from a consumer score alone.
Lender floors and pricing
Many lenders set minimums well above HUD’s floor, and pricing often changes in steps as scores move between bands. A charge-off that moves you from one band to the next can change your rate even if you still qualify. Conventional programs commonly start around 620, which is one reason borrowers with derogatory credit often find FHA the more workable route.
For a first look, Duane Buziak uses a NoTouch Credit Pull, a soft pull with no hard inquiry, so you can see where you stand before any lender-level credit check is run.
What a Charge-Off Does to Your Payment: MIP, Down Payment, and a Worked Example
A charge-off does not add a fee of its own. It affects cost indirectly, through your credit tier, which sets your minimum down payment and often your rate. The mortgage insurance premium (MIP) rules are the same for every FHA borrower.
MIP and limits (verified as of October 2026)
- Upfront MIP (UFMIP): 1.75% of the base loan amount, flat, usually financed (HUD Mortgagee Letter 2015-01).
- Annual MIP: 0.55% for the most common tier: 30-year term, loan-to-value above 95%, base loan at or under $726,200. The full range across tiers is 0.15% to 0.75% (HUD Mortgagee Letter 2023-05 and Handbook 4000.1, Appendix 1.0).
- 2026 FHA loan limits, one unit: $541,287 floor and $1,249,125 ceiling, effective for case numbers assigned on or after January 1, 2026 (HUD Mortgagee Letter 2025-23). Richmond-area counties such as Henrico, Chesterfield, and Hanover are generally covered by the standard floor, but look up the exact county figure on HUD’s limit lookup before you shop.
Worked example: Henrico County
This is an illustration, not a quote. Assume a $350,000 home in Henrico County, a 30-year loan, and an assumed 6.50% rate. Henrico’s published real estate rate is $0.85 per $100 of assessed value (henrico.us). Assessed value is assumed equal to price, and homeowners insurance is assumed at $1,500 per year.
Scenario A: 580+ score, 3.5% down
- Down payment: $12,250. Base loan: $337,750.
- UFMIP: $337,750 x 1.75% = $5,910.63, financed. Total loan: $343,660.63.
- Principal and interest at 6.50%: about $2,172.
- Annual MIP at 0.55% (about $1,858 per year, approximated on the base loan): about $155 per month.
- Property tax: $350,000 x 0.85 / 100 = $2,975 per year, or about $248 per month.
- Insurance: $125 per month.
- Estimated monthly total: about $2,700.
Scenario B: 500 to 579 score, 10% down
- Down payment: $35,000. Base loan: $315,000.
- UFMIP: $5,512.50, financed. Total loan: $320,512.50.
- Principal and interest at 6.50%: about $2,026.
- Annual MIP at 0.50% (90% loan-to-value): about $131 per month.
- Tax and insurance unchanged: about $373 per month.
- Estimated monthly total: about $2,530.
The lower tier requires $22,750 more cash at closing, in exchange for a payment about $170 lower each month. Closing costs are separate; Duane Buziak can walk through no-out-of-pocket closing options such as seller concessions and lender credits where they apply to your file.
Charge-Off Fixes That Help and Ones That Backfire
Start by pulling all three reports at AnnualCreditReport.com. Check the account owner, balance, date of first delinquency, and status on each. Errors in any of those can be disputed using the CFPB’s dispute guidance. A wrong delinquency date matters because it controls how long the item can report.
Paying or settling
Paying a charge-off may not raise your score quickly, and for many FHA files it is not required. Be careful before sending money: in some states a payment or written acknowledgment can restart the statute of limitations on an old debt, and paying the wrong party can leave a second collection account open. Talk to Duane Buziak before you pay anything, so the decision is made against your specific file and lender.
Pay-for-delete and goodwill letters
A pay-for-delete is an offer to pay in exchange for the item being removed. A goodwill letter asks a creditor to remove a late mark as a courtesy. Neither is guaranteed, collectors and creditors often decline, and no one can promise a result. Treat them as possible upsides, never as the plan.
What underwriters like to see
- A short, honest letter of explanation covering what happened and why it will not recur.
- Proof of any payment plan, and that it is current.
- At least 12 months of on-time payments on your remaining accounts, a strong compensating factor.
- Stable income and reserves.
What to avoid
Do not open new credit, finance a car, or miss a payment on any open account while your file is in process. New inquiries and new debt change both your score and your DTI, and a file that was approvable can slip into a Refer outcome.
Duane Buziak’s Broker Approach and Where Charge-Offs Fit by State
Duane Buziak is a mortgage broker, not a lender or a bank. FHA Mortgages by Duane Buziak has access to more than 500 wholesale lenders, which matters most for files with derogatory credit: since overlays differ, the work is finding lenders whose guidelines fit your history instead of fitting your history to one lender’s rules. His Dare to Compare pricing challenge lets you set a competing quote against the options he finds.
One caution on credit pulls: some lenders require a hard pull to pre-qualify. Duane’s first review uses the NoTouch Credit Pull, a soft pull with no hard inquiry. Large national retail lenders such as Rocket and Movement each apply their own underwriting guidelines, so it is reasonable to compare their quotes against what a broker finds, but ask each one directly about its credit overlays rather than assuming.
Virginia
Federal FHA credit rules are the same everywhere; what changes locally is cost. In the Richmond metro, published real estate rates per $100 of assessed value are Henrico $0.85 (henrico.us), Chesterfield $0.89 (chesterfield.gov/823), and Hanover $0.81 (hanovercounty.gov/386). Stafford County’s rate should be confirmed at staffordcountyva.gov before you budget, since it is in the middle of a change. On a $350,000 home, the gap between Hanover and Chesterfield is about $280 a year.
Florida, Tennessee, Georgia, and DC
In Florida, the homestead exemption under Florida Statute 196.031 reduces assessed value by up to $50,000 for qualifying primary residences, but it does not apply in your first year of ownership, so first-year taxes can run higher than later bills. Tennessee, Georgia, and the District of Columbia each have their own tax and insurance structures. HUD’s charge-off treatment stays the same across all of them, while lender overlays and local costs vary.
Frequently Asked Questions About FHA Loans and Charge-Offs
Do I have to pay off a charge-off for FHA?
Generally no for non-mortgage charge-offs, under current HUD guidance. Some lenders require it anyway as an overlay, and collection accounts, judgments, tax liens, and federal debts follow different rules.
Can I get an FHA loan with a charge-off in the last year?
It can be possible. HUD does not impose a fixed waiting period for charge-offs, but the file will be scrutinized for recency and cause, and many lenders want to see a stretch of clean payments.
How long does a charge-off stay on my report?
Up to seven years from the date of first delinquency under the Fair Credit Reporting Act. Paying it does not reset or shorten that period.
Does a paid charge-off look better?
To an underwriter, a paid or resolved account generally reads better than an open one. The score effect varies and may be small.
What score do I need?
HUD’s floors are 580 for a 3.5% down payment and 500 for 10% down. Many lenders require more than HUD does.
Can a charge-off trigger manual underwriting?
Yes. If the automated system returns a Refer finding, the lender must underwrite manually, with tighter DTI limits unless compensating factors are documented.
What is a goodwill letter?
A written request asking a creditor to remove a negative mark as a courtesy. Results are not guaranteed.
Does a charge-off affect MIP?
Not directly. Annual MIP depends on loan term, loan amount, and loan-to-value. A lower credit tier raises the required down payment, which can change your loan-to-value and therefore your MIP tier.
A Charge-Off Is a Manageable FHA Obstacle, Not a Denial
A charged-off account changes how your file is read, and sometimes which lender can approve it, but it does not close the door on an FHA loan. The practical steps are to know your three reports, understand your score tier, and put the file in front of a lender whose overlays fit it. Duane Buziak at FHA Mortgages by Duane Buziak can review your file, run a NoTouch Credit Pull (soft pull, no hard inquiry), and compare options across more than 500 wholesale lenders, with no-out-of-pocket closing options where they apply.
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. 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.
