You may wonder if it’s even worth the effort to apply for a mortgage with collection accounts on your credit report. If you’re wondering whether or not to go for it, the answer is – maybe. Like other items on your credit report, the degree to which a collections account will affect approval depends on the type, status and length of time since the collection.
When a creditor sends your account to collection, it’s safe to say that your delinquency has gotten out of control. The creditor has given up, written off the debt and sold it to a collection agency. In addition to a barrage of threatening letters and phone calls from the collector, you can look forward to having this information displayed prominently on your credit report for your mortgage company to see. It may not be the deciding factor in a denial, but it’s a definite strike one.
Credit Report Impact
Being judged based on a number may seem unfair, but your credit score is a good indicator of your ability to repay. Credit scores range from 300 to 900, with the average consumer falling in the 600 to 700 range. If your score falls below 620, you’re considered “high risk,” usually too high-risk to get a mortgage. An account in collections is the culmination of a long period of delinquency, at least 90 days. Your creditor reports the debt to the credit bureaus at 30, 60 and 90 days past due. Each report lowers your score. By the time your account goes to collections, your score can be in the 500s. Banks often take one look at a score this low and decide to pass on your application.
Types of Collection
The type of collection account can sometimes make a difference. The bank’s underwriter sees collection accounts in the “Public Records” section at the front of the credit report. If you have secured debt like auto loans or unsecured obligations like credit cards in collection, you likely won’t get approved. However, the underwriter may overlook certain types of collections, like medical, entirely. The reason behind this is that medical collections are often contested due to misunderstandings with insurance companies. If this is the case, it doesn’t hurt to submit a letter of explanation along with your application.
How to Remove a Collection Account
Under the Fair Credit Reporting Act, a collection will remain on your credit report for seven years from the date of the first delinquency. Even if you satisfy the collection, it still sticks out like a sore thumb when you apply for a mortgage. The best way to deal with a collection account is to pay it off as soon as possible. After that, you just have to play the waiting game and hope that by the time you go to get a mortgage, the collection is far enough in the rearview mirror that the bank can overlook it.