Can You Buy a Home if You've Had Collections
Getting a home loan does not require you to have absolutely perfect credit. You may be able to have had collections in your past and still get approved for a mortgage. It all depends on the type of debt you have, how much there is, and the type of lender and loan you are attempting to get.
How Collections Affect Getting a Mortgage
Mortgage lenders depend heavily on your debt-to-income ratio. One of these ratios deals with your potential housing cost and your gross income each month. Your debt-to-income ratio lets the lenders understand how much you can afford, considering the amounts you need to pay to resolve your collection accounts. The other deals with your total debts and payments each month. These monthly debt payments include student loan payments, car loans, childcare, child support, and the added mortgage you are attempting to get. The magic number for most lenders is a Debt-to-Income ratio, or DTI below 43%. Next, let’s talk about derogatory or late credit and how it can affect your ability to qualify.
Derogatory Credit
When determining approval for a mortgage, lenders may cap the amount of derogatory credit that you can have in order to qualify for the loan. This includes items like collections, charge-offs, judgments, and liens. Collections and charge-offs are not usually figured into your DTI unless you are currently making payments on those accounts.
Tax liens and judgments are two items that must be satisfied before you can be approved to close on your home loan. Those with tax liens may be able to close if there is a repayment plan set up with 12 months of on-time payments.
Next, let’s talk about what to do with collection accounts. We will begin with new collections.
What To Do W/ New Collections
Before you do anything with any collection accounts, you should always check with your lender. If you are going to pay off any new collection accounts, you want to be sure to get a detailed payment arrangement in writing before paying. The arrangement should detail the total amount you will be paying, the number of payments you will have to make, when the payments are due, are collection fees or interest added, and what will happen at the end of your payment term.
How about older collection accounts?
Old Collections
The first thing you need to do when you see old collections on your credit report is to make sure that you owe the account. If not, you need to send requests to all credit reporting agencies asking them to delete the account.
If you have determined that the information on your credit report is correct, it is time to figure out what you will do with the debt. Paying off old collections can do more damage to your credit score. While it’s great to get your credit report cleared out, paying off an old collections account will bring the report current. This can drop your credit score and affect your ability to get a mortgage with collections.
The only way paying the account will help is for the collector to remove the collection from your credit history, called “pay for delete”. And understand that all lenders allow a certain amount that may be in collections for a borrower. It may be better to just keep your current accounts current with balances below 30% of their maximum.
Check Local Statute of Limitations
Collections that are 12 months or older do not affect your credit score. Check with your state to check the statute of limitations on debt collection. Usually, this is three to six years.
Don’t Reactivate the Account
Having collections on your credit score can do great damage. But the effect that collections have on your credit score diminishes over time. When you start paying off these old debts, you bring the account to the forefront again.
If you have student loan collections, you will want to check with your lender to see if you can qualify for a mortgage. Defaulting on a student loan can put a hold on your dream of homeownership. Federal student loan debt is not dischargeable and does not have a statute of limitations. FHA mortgage loans will certainly not be approved for anyone with defaulted student loans. If you have defaulted there are options to get back on track. These include loan rehabilitation, loan consolidation, and repayment in full.
How about medical collections?
With medical accounts, credit bureaus must remove paid accounts from your credit report within 45 days. Negotiate with these collection agencies in writing and wait for a signed agreement before paying the account.
Getting a Mortgage w/ Collections on Your Credit Report
Mortgage underwriters may not require that all old collections be paid off, but they will most likely require a letter explaining why the accounts are in collections.
Knowing where you stand and getting a handle on your credit report early is important. Get a full picture of your credit and create a strategy to make improvements. .
