One of the most common things a first time buyer tells me, usually a little embarrassed, is that they have something in collections and assume it kills the whole idea. It usually does not. I have closed plenty of first purchases with an old phone bill or a medical collection still sitting on the report. What matters is which loan you use, how much the collections add up to, and a couple of rules most people have never heard of. If you are just getting started, our first time home buyer Arizona guide covers the full process. This page is only about collections.

The short version by loan type

FHA puts a $2,000 line on collections, and a Fannie Mae conventional loan on a home you will live in usually lets them stay. Here is the side by side.

The FHA column comes from HUD's own answer on collections, which points to Handbook 4000.1. The conventional column comes from Fannie Mae's Selling Guide section B3-5.3-09, DU Credit Report Analysis, dated August 5, 2026. Lenders can add their own rules on top of both, which is one reason a broker who can shop more than one lender helps here.

FHA: the $2,000 rule

If your collections add up to less than $2,000, FHA's payoff rule does not kick in. Once they reach $2,000 or more, HUD gives the lender three choices:

• Pay them in full at or before closing, with money from an acceptable source.
• Set up a payment arrangement with the creditor, and the monthly payment goes into your debt to income ratio.
• Count 5% of each balance as a monthly payment in your debt to income ratio, if no payment arrangement is available.

That last option is where people get surprised. A $3,000 collection counted at 5% adds $150 a month to your debts on paper, even though you are not actually paying it. That can be the difference between qualifying for the house you want and qualifying for a smaller one. Our debt to income guide shows how that number fits into the bigger picture.

A $3,000 collection you are not paying can still cost you $150 a month in buying power.

So the math decides the move. If paying off the collection costs less than the house you lose by carrying $150 a month, paying it at closing may make sense. If you are well under your ratio limits, leaving it alone and keeping your cash may be smarter. HUD also says that on a manually underwritten loan, the lender has to look at why the collections happened and you will write a letter of explanation for each one. Our FHA loans in Arizona page covers the rest of FHA's rules.

Conventional: collections can usually stay

On a Fannie Mae loan run through Desktop Underwriter for a one unit home you will live in, you are not required to pay off outstanding collections or non mortgage charge offs, regardless of the amount. That is straight from Selling Guide B3-5.3-09.

The rule tightens for other property types. Fannie Mae requires collections and non mortgage charge offs totaling more than $5,000 to be paid on two to four unit owner occupied homes and second homes. Investment properties have even lower limits. For a first time buyer buying a single family home or condo to live in, that rarely comes up.

Two catches. First, accounts that are past due but not yet in collections must be brought current. Second, collections still affect your credit score, and your score drives your rate and mortgage insurance cost. If your score is the real problem, our credit score guide for first time buyers and our post on rapid rescoring are the next stop. The conventional loans page covers the 3% down options.

Medical collections

Medical collections get gentler treatment than any other kind. Fannie Mae's DU guidance excludes medical collection accounts from its payoff limits and says they do not have to be paid in full at or before closing.

Many medical collections may not even be on your report anymore. According to the Consumer Financial Protection Bureau, Equifax, Experian and TransUnion removed paid medical collections, and as of April 11, 2023 they also removed medical collections under $500. If you still see one of those on your report, the CFPB says you can dispute it with the credit bureau. Check your reports before you apply, not after.

Run your own numbers

Arizona's community property twist

On an FHA loan in Arizona, your spouse's collections can count against you even if your spouse is not on the loan. HUD says collection accounts of a non borrowing spouse in a community property state must be included in the $2,000 cumulative balance unless state law excludes them. Arizona is a community property state.

I have seen this catch couples who planned to buy in one spouse's name because that spouse had the better credit. The lender still pulls the other spouse's credit for this purpose, and their collections still go into the math. If that is your plan, tell your loan officer at the start. Our post on spouses and community property on an Arizona mortgage walks through the rest.

Judgments, charge offs and disputes

Judgments are the one item you should expect to deal with. On a Fannie Mae loan, open judgments and outstanding liens in the public records section of your credit report must be paid off at or before closing, and the lender documents the payoff. FHA has its own judgment rules, so plan on handling any judgment before you buy either way.

Charge offs that never went to a collection agency are treated like collections on the conventional side. Fannie Mae does not require non mortgage charge offs to be paid off on a one unit home you live in. On FHA, your loan officer will walk you through how your specific accounts are read.

Disputes are where I see the most self inflicted damage. If you plan to dispute an account, call your loan officer before you do it. A dispute can change how an underwriting system reads your credit file, and a dispute filed in the middle of a loan can slow everything down. Fix real errors, absolutely. Just do it in the right order.

What to do before you apply

Pull your reports, list every collection, and get a pre-approval before you pay anything. In that order.

1. Pull all three credit reports. Write down every collection, its balance, and whether it is medical.
2. Add up the non medical balances. If you are under $2,000 and leaning FHA, the payoff rule does not apply.
3. Do not pay anything yet. Get a pre-approval first. Some collections never need to be paid for your loan, and the money may be worth more as down payment or reserves. If one does need to go, it can often be paid at closing.
4. If you are married, include your spouse. In Arizona that matters on FHA even if they are not on the loan.
5. Get it in writing. Any settlement or payment plan should be in writing so the underwriter can document it.

Once you know your number, you can browse homes on Arizona Luxury Property Search and send us any address for a real payment. Buying out in Pinal County? Our Maricopa first time buyer guide covers loan limits and prices there. And our list of first time buyer mistakes has a few more traps worth avoiding. If you want to know who you would be working with, here is my page, and the first time home buyer Arizona hub has every guide we have written for first purchases.

Honest caveat: paying off an old collection does not always help your score the way people expect, and sometimes the cash does more for you somewhere else. There is no single right answer. That is exactly why I want to see your actual report before you spend a dollar on old debt.

Sources

• HUD FHA Resource Center, Does FHA require collections to be paid off for a borrower to be eligible for FHA financing? (citing Handbook 4000.1 II.A.4.b.iv(M), II.A.5.a.iii(D), II.A.5.a.iv(O)), checked November 4, 2026
• HUD Handbook 4000.1, FHA Single Family Housing Policy Handbook, last revised August 12, 2026, checked November 4, 2026
• Fannie Mae Selling Guide B3-5.3-09, DU Credit Report Analysis (08/05/2026): collections, charge offs, medical collections, judgments and liens, checked November 4, 2026
• Consumer Financial Protection Bureau, Have medical debt? Anything already paid or under $500 should no longer be on your credit report (May 8, 2023), checked November 4, 2026
• HUD, Let FHA Loans Help You (down payment as low as 3.5%), checked November 4, 2026
• Freddie Mac Primary Mortgage Market Survey, week of October 29, 2026 (30 year fixed 7.24%), used in the calculator default, checked November 4, 2026

This article is general information from Pillar Mortgage Group, not a loan offer or a commitment to lend. Loan limits, program rules, rates and market figures change, and every loan is subject to credit approval. Pillar Mortgage Group, LLC, NMLS #2700076, Arizona License MB-2009671, Equal Housing Lender.

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