If you find out that you have collection accounts reporting on your credit report when you apply for a mortgage, you have a few options.
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You might be surprised to find out that you shouldn’t just go and pay the collection, though. Before you do, you should do some research. You might be better off leaving the account untouched. We’ll discuss the reasons why below.
Old Collections Aren’t a Big Issue
The first thing to check is the age of the collection. Is it new or many years old? If it’s old, don’t touch it. Instead, find out your state statutes regarding collections. Each state has their own laws regarding the statute of limitations on collections. In other words, creditors or
collection agencies can only come after you for a short time. After that time expires, they can no longer take collection action against you.
Here’s the trick, though. If you call the collection agency about the debt, make a payment, or otherwise interact with the creditor regarding the debt, it can make the debt active again. The collection agency will report it to the credit bureau as a ‘recent collection.’ In essence, this restarts the clock, giving the collection agency free reign to come after you for the debt.
Don’t contact the collection agency until you know that you will owe the debt before you can pay the mortgage.
New Collections Should be Paid
If you know you have a newer collection on your credit report, you will likely have to pay it. That doesn’t mean you have to pay the full amount or have to abide by the collection agency’s crazy payment plan. You have to negotiate.
The first thing you should do is contact the creditor themselves. See if you can work out a payment plan with them. Some creditors will work with you, while others will not. If the creditor will work with you, ask about a payment plan that includes a payment that
you can afford. By default, most lenders use 5% of the balance to figure out your payment. They include this amount in your debt ratio, which can greatly hurt your chances to get a mortgage.
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Instead, negotiate a smaller payment that gets the debt paid in a recent amount of time, but allows you to qualify for a mortgage. If the creditor won’t negotiate with you, it’s time to negotiate with the collection agency. This could prove to be a little tougher.
Make sure you negotiate everything in writing. Don’t ever take a verbal payment plan. There’s nothing to prove that you made this payment plan moving forward. The lender will need proof of the lower payment as well in order to include the proper amount in your debt ratio.
The Exception to the Rule
If you have medical collections on your credit report, you may not have to repay them before you can get a mortgage. This doesn’t mean you can just let the debt go, but it is less likely to hamper your chances of a mortgage approval.
Medical collections affect your credit score less than other collections, such as
credit card debt collections. You can also make a payment on them or ‘reactivate’ them and not worry about it hurting your credit score or resetting the clock.
You might feel morally obligated to pay your collections, medical or otherwise, and that’s fine. Just make sure you talk to your lender before you do anything if you are applying for a mortgage. The worst thing you can do is reset the timeline on the debt and give the collection agency free reign to come after you. If your lender will work with a payment plan in your debt ratio, go ahead and work out a payment plan. If you are near the statute of limitations, though, it may be better to just let it go for the sake of your credit score.
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