A charge-off happens when a creditor gives up on collecting a debt through normal billing and records it as a loss. On a credit card, that usually comes after about six months of missed payments. The account then shows as "charged off" on your credit report with the unpaid balance, and the debt is often sold to a collector, at which point a separate collection account can appear too. For a mortgage, a charged-off credit card or car loan is usually far less of an obstacle than buyers fear.
How each program counts it
| Program and property | Charged-off credit card, car loan or other non-mortgage debt |
|---|---|
| FHA, any 1 to 4 unit home you'll live in | Left out of your debts and doesn't need to be paid |
| Conventional, one-unit home you'll live in | No payoff required, whatever the amount |
| Conventional, 2 to 4 units you'll live in | Paid at or before closing when collections and charge-offs together total more than $5,000 |
| Conventional, investment property | Paid when any one account is $250 or more, or all of them total more than $1,000 |
A charged-off mortgage is a different matter. Fannie Mae lists it with foreclosures and short sales as a significant derogatory event and requires four years from the charge-off date, or two years with documented extenuating circumstances.
Your score is where a charge-off does its damage. The late payments that led up to it pull the score down most in the first year or two, and the effect fades as on-time history builds on top of it.
A worked example on a duplex
Carlos plans to buy a $420,000 duplex and live in one unit. His report shows a $4,100 charged-off credit card and a $2,300 non-medical collection.
On Conventional with 5% down: collections and charge-offs total $6,400, which is over $5,000, so all of it gets paid at or before closing. His cash need is $21,000 for the down payment ($420,000 × 5%) plus $6,400, or $27,400 before closing costs.
On FHA with 3.5% down: the charge-off doesn't count. The $2,300 collection is over FHA's $2,000 line, so without a payoff or plan, the lender counts 5% of it, $115 a month, in his debt-to-income ratio. His down payment is $14,700 ($420,000 × 3.5%), and nothing has to be paid on either account.
That's a $12,700 difference in cash before closing costs. On either loan, 75% of the other unit's rent counts toward his income.
What you can do with one on your report
- Check that the balance and dates are right on all three reports, and dispute errors.
- Keep every current account paid on time; recent history outweighs an old charge-off.
- Hold off on settling a charge-off until we've looked at your program, since paying it can be unnecessary on FHA and required on a Conventional duplex.
- If a mortgage was charged off, write down the date and the cause. Fannie Mae measures the wait from that date.
The credit score requirements guide shows what each score tier opens. To learn whether your charge-offs need to be paid for the home you have in mind, call AAA Capital Funding at 888-601-8344.