Can You Get a Mortgage with Collections?

Securing a home loan doesn’t require perfect credit, nor does it mean you must be debt-free. You can have collections and still be approved for a mortgage loan to buy a house. 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.

When reviewing your credit report, seeing those collection accounts may tempt you to hurry and pay them off. Is that the best way?  Well, here we share how collections affect you during the loan mortgage approval process.

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How Collections Affect Securing a Mortgage

Debt to Income Ratio

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 DTI below 43%, meaning mortgage lenders may require this specific debt to income ratio for home buying.

Derogatory Credit

When determining approval for a mortgage, lenders may also cap the amount of derogatory credit allowed. This includes 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.

What To Do With Old Collections

New Collections

When negotiating new collections and past-due accounts, make sure you 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.

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.

That said, while having an unpaid collection removed from your credit report may sound like a smart move, make sure you do not discuss old collections with creditors when working to get a mortgage and buy a house. You will inadvertently restart the clock. In writing, ask for them to provide documentation that you owe the debt and that they are authorized to collect it. Tell them that you do not acknowledge the debt. Dispute these accounts with the credit bureaus if the creditor cannot prove that you owe it. If old debt is reported as new, you can have it removed.  This is a violation of the Fair Credit Reporting Act.

Establish Payment Plans for Large Collection Accounts

Large debts can result in lenders adding five percent to your outstanding balance, reducing the amount that you qualify for. While they may not require you to pay, it is best to establish a repayment plan with the creditor or work through relief such as debt settlement.

Getting a Mortgage with Collections on Your Credit Report

Mortgage underwriters do not require that all old collections be paid off, but oftentimes they will require a letter explaining why the accounts are in collections.

FAQs About Getting a Mortgage with Collections

Can I get a mortgage with student loans in collections?

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.

Can I get a mortgage with 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.

Can I Buy a House with 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. But know that, while challenging, it is possible to be approved for a mortgage with collections on your credit report and buy a house. If you do choose to pursue debt relief, your odds will be greater if you’ve improved your credit score and working on buying a house after debt settlement.