You can actually are ok with an old chargeoff without paying it off if you count 5% of the balance as a monthly payment and include in in the DTI Ratio. This would be FHA
For Example... if you had a $12,000 old debt, you can count 5% or $600/mo against your debt to income ratio and could still qualify if you're still within your DTI requirements.
I would NOT wake up an old collection unless you are trying to do a Settlement. If it's done reporting, this could re-report and hurt your scores.
I have a charged off installment loan for 12682. My last payment was in 2016. The creditor is reporting monthly on my report "failed to pay". I want to buy a house in September. My credit score should be in the mid 600s. Would I disqualify with this unpaid chargeoff. Could I potentially enter into a payment plan with the creditor to better my chances of approval?
The charge off itself is not a "problem" in terms of underwriting requirements for FHA & VA loans but it could be a problem for you down the road.
The biggest concern is that the original creditor could sell the account to a collection agency (CA). Once a CA picks up the account, they can report it to the credit bureaus & that's going to hurt your scores. The other concern is the CA could take you to court & get a judgment against you at which point they can attempt to garnish your wages.
If you can get the original creditor to settle the account you eliminate the possibility of the account being sold to CA.
I would first offer a small lump sum to settle the account & see what they say. If they won't bit then you can talk to them about setting up a payment plan but make sure you try to get them down on the total amount owed.