By Rafeek Nassief, President, Premium Capital California · Last reviewed October 8, 2026
When you apply for a mortgage, your loan officer reviews your credit report against published underwriting rules from Fannie Mae, Freddie Mac and the Department of Housing and Urban Development (HUD), which oversees FHA loans. Knowing those rules ahead of time is the heart of borrower readiness. This guide covers payment history, recent late payments, credit utilization, and how unpaid collections can affect your debt-to-income ratio.
What lenders review on your credit report
Fannie Mae's Selling Guide lists the credit report characteristics its automated underwriting system, Desktop Underwriter (DU), uses to assess borrowers with traditional credit: "credit history, delinquent accounts, installment accounts, revolving credit utilization, public records, foreclosures, collection accounts, and inquiries" (Fannie Mae Selling Guide, B3-2-03, Risk Factors Evaluated by DU). DU also weighs non-credit factors such as debt-to-income.
Freddie Mac says your credit score and credit history are "key factors in determining your eligibility for a mortgage" (My Home by Freddie Mac, Understanding your credit).
Payment history
Payment history leads the list. Fannie Mae says, "Payment history is a significant factor in the evaluation of the borrower's credit." DU considers the severity of delinquencies (30, 60, 90 or more days late), how long ago they happened, and the number and type of accounts not paid as agreed (Fannie Mae, B3-2-03).
Freddie Mac makes the same point for scores: "Late payments will lower your credit score" (Freddie Mac). Our late payments page explains how late payments appear on a report.
Recent late payments
When a late payment happened matters as much as whether it happened. Fannie Mae gives a direct example: "a 30-day late payment that is less than three months old indicates a higher risk than a 30-day late payment that occurred several years ago" (Fannie Mae, B3-2-03).
Late payments on a mortgage
Recent mortgage lates get special attention. Fannie Mae's guide says that if a borrower's credit report shows a mortgage tradeline 60 or more days past due when last reported, and that account was reported within the 12 months before the credit report date, the loan casefile will receive an Ineligible recommendation in DU (Fannie Mae Selling Guide, B3-5.3-09, DU Credit Report Analysis).
Accounts that are past due right now
Fannie Mae also says accounts reported as past due (not reported as collection accounts) "must be brought current" (Fannie Mae, B3-5.3-09).
Credit utilization
Utilization is how much of your available revolving credit, mainly credit cards, you're using. Fannie Mae explains that DU uses trended credit data to evaluate how you manage revolving accounts: "A borrower who uses revolving accounts conservatively, meaning low revolving credit utilization or regular payoff of revolving balance, is considered lower risk. A borrower whose revolving credit utilization is high or who has low available revolving credit is considered higher risk" (Fannie Mae, B3-2-03).
Freddie Mac adds: "If your credit cards are at their limits, this can lower your credit score, even if the amount you owe isn't large" (Freddie Mac).
Why unpaid collections can matter for debt-to-income
Your debt-to-income (DTI) ratio compares your monthly debt payments with your monthly income. Fannie Mae says the DTI ratio consists of total monthly obligations (including the new mortgage payment and other long-term and significant short-term monthly debts) and total monthly income of all borrowers used to qualify (Fannie Mae Selling Guide, B3-6-02, Debt-to-Income Ratios).
How collection accounts factor in depends on the loan program.
FHA loans
HUD's FHA handbook has a specific rule. If the credit reports show cumulative outstanding collection account balances of $2,000 or greater, the lender must do one of the following (HUD, FHA Single Family Housing Policy Handbook 4000.1, Collection Accounts):
- verify the debt is paid in full at or before settlement
- verify you've made payment arrangements with the creditor and include the monthly payment in your DTI
- if no payment arrangement is available, calculate a monthly payment using 5 percent of the outstanding balance of each collection and include it in your DTI
So an unpaid collection can add to your DTI even if you aren't paying on it. The same handbook lists medical collections among "obligations not considered debt," and says charge-off accounts do not need to be included in the borrower's liabilities under its automated scorecard rules.
Conventional loans through Fannie Mae
Fannie Mae's rules differ. Its guide says that for one-unit, principal residence properties, borrowers are not required to pay off outstanding collections or non-mortgage charge-offs, regardless of the amount, and that medical collection accounts are excluded from its limits (Fannie Mae, B3-5.3-09). The same section says open judgments and outstanding liens shown in the public records section of the credit report must be paid off at or before closing. Collection accounts are still part of DU's credit risk assessment (Fannie Mae, B3-2-03).
Your loan officer can confirm how each collection on your file will be treated. Our collections page explains how collection accounts appear on a report.
Accuracy matters, and timing matters too
Everything above assumes your report is accurate. If it isn't, the FTC says both the credit bureau and the business that supplied the information are responsible for correcting inaccurate or incomplete information, at no cost to you (FTC, Fixing Your Credit FAQs). The FTC suggests that, if possible, you wait until any mistake is corrected and your report is accurate, complete and up to date before you apply for a loan for a big purchase like a house.
Timing matters for a practical reason. Both Fannie Mae and HUD have rules for accounts that a borrower has formally challenged with the bureaus. Fannie Mae says the lender may need to investigate those accounts, and that their monthly payments must be included in DTI if the accounts belong to the borrower (Fannie Mae, B3-5.3-09). HUD says that if challenged derogatory accounts total $1,000 or more (excluding medical accounts and documented identity theft), an FHA loan must be manually underwritten (HUD, Handbook 4000.1). A financial review well before you apply gives you room to plan with your loan officer.
How Premium Capital California approaches borrower readiness
Premium Capital California is a credit management company serving clients in all 50 states. Our focus for home buyers is loan approval readiness: a credit file that's accurate and well managed when your loan officer pulls it. We use three pillars together: challenge what doesn't belong, work what you already have, and add positive history.
- Challenge what doesn't belong: items that are inaccurate, incomplete, outdated or unverifiable.
- Work what you already have, with coaching on utilization and on-time payments as part of a score improvement plan.
- Add positive history over time.
Lenders make approval decisions, so we don't promise an approval, a score or a date. See how it works and compare plans on our pricing page.
Next step: a free consultation
Planning to buy a home? Book a free consultation for a financial review of your credit report before you apply.
Frequently asked questions
Do I have to pay off collections to get a mortgage?
It depends on the loan. Fannie Mae says borrowers buying a one-unit principal residence aren't required to pay off collections. For FHA loans, HUD says that if collections total $2,000 or more, the lender must verify payment, use a payment arrangement, or count 5 percent of each balance in your DTI.
How much do recent late payments matter to a mortgage lender?
A lot. Fannie Mae says a 30-day late payment less than three months old indicates higher risk than one from several years ago, and a mortgage 60 or more days late reported within the past 12 months makes a loan ineligible in DU.
Does credit card utilization affect a mortgage application?
Yes. Fannie Mae says low revolving credit utilization is considered lower risk and high utilization higher risk.
This article is for general education only. It is not legal, financial, credit or mortgage advice, and it does not promise any loan approval, score or timeline. Loan requirements vary by lender and program; confirm details with your loan officer.
Sources
- Fannie Mae Selling Guide, B3-2-03, Risk Factors Evaluated by DU: https://selling-guide.fanniemae.com/sel/b3-2-03/risk-factors-evaluated-du
- Fannie Mae Selling Guide, B3-5.3-09, DU Credit Report Analysis (08/05/2026): https://selling-guide.fanniemae.com/sel/b3-5.3-09/du-credit-report-analysis
- Fannie Mae Selling Guide, B3-6-02, Debt-to-Income Ratios (04/02/2025): https://selling-guide.fanniemae.com/sel/b3-6-02/debt-income-ratios
- My Home by Freddie Mac, "Understanding your credit": https://myhome.freddiemac.com/buying/understanding-your-credit
- HUD, FHA Single Family Housing Policy Handbook 4000.1 (Update 18, last revised 8/12/2026): Collection Accounts, Charge Off Accounts, Obligations Not Considered Debt, Disputed Derogatory Credit Accounts: https://www.hud.gov/sites/default/files/Housing/documents/40001-hsgh-Update-18.pdf
- FTC, "Fixing Your Credit FAQs": https://consumer.ftc.gov/articles/fixing-your-credit-faqs
