Getting a Home Loan With Unpaid Collection Accounts


If you have unpaid collection accounts on your credit report, your first inclination is probably to pay the debts. We don’t recommend that you do that, though. Your first step should be to talk to your mortgage lender. While it might sound strange, if you pay the debt or acknowledge its relevancy in any way, it could reactivate the collection, making it a ‘fresh’ collection rather than an old collection.

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First Things First

First, before you do anything, you should verify the legitimacy of the collection. Is the debt yours? Did you owe it and not pay it? Some collections agencies make it their business to buy ‘old collections.’ They then make the new again by contacting consumers and threatening to sue them if they don’t pay the debt. Consumers that don’t know better go ahead and pay the debt, which is what restarts the debt all over again.

Before you agree to anything, get the details of the collection in writing. This way you can determine if it is your debt. If you agree that it is your debt, you’ll have to take further steps, but the first step is not to pay it.

Clearing Up Your Credit Report

If you find that the collection doesn’t belong to you or isn’t valid for some reason, you can dispute the collections with the credit bureaus. This may take time and you’ll need plenty of proof that the collection is not valid. The credit bureau has 30 days to respond to your request to remove the collection from your account. During that time, the credit bureau will do their own investigation to determine if the debt is valid or not.

Make sure that you get everything in writing, whether the credit bureau sides with you or against you. The more documents you have to prove your case, the better your chances are of getting the approval that you need.

Paying the Collections

If it turns out that the collections do belong to you, it’s time to figure out the next step. If they are small amounts, you may be able to just pay the collection off in full. You should get proof in writing that you paid the collection and satisfied it in its entirety. Without that proof from the collection agency, the lender may think the collection is still valid.

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If the collection is more than you can afford to pay in full at once, your lender may suggest that you make a payment arrangement with the creditor. The payment arrangement must also be in writing. This way the lender can include the proper amounts in your debt ratio. If you fail to get proof in writing, the lender may use their own calculation, which can be as much as 5% of the outstanding balance. Let’s say you have a $10,000 collection. The lender could use $500 as your monthly payment. That’s a large payment that could send your debt ratio sky high. This could mean that you don’t get approved for the loan.

Now if in reality, your payment arrangement was for $100, that’s a much lower number to add into your debt ratio. You may have a better chance of securing the approval that you need with this lower number.

Dealing With New Collections

If you have new collections that you know are on your credit report, it may be best to pay it off before you even apply for your home loan. If you don’t pay it off, the lender may require that you pay it off at or before the closing. They may also require written proof from the collection agency that the debt is satisfied. This lets the lender know that the collection agency won’t come after you in the future regarding this debt and that the lender’s position on your home will not be at risk.

Dealing with collections on your credit report isn’t easy. If you are unsure about how to deal with the collection agency, ask for help. Your lender may be able to give you some pointers or you may even want to enlist the help of your attorney. Collection agencies can make themselves seem like they have so much power over you. Don’t let them intimidate you. Instead, do what your lender suggests in dealing with the collections to give you the best chance of getting your mortgage approved.

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