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 collection account will affect approval depends on the type, status and length of time since the collection.
Since having an account in collections lowers your credit score, it may affect your mortgage approval.
Overview of Collection Accounts
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 a debt. FICO credit scores range from 300 to 850, and as of 2017, the average credit score was at an all-time high of 700. If your score falls below 620, you’re considered high risk and probably won't qualify for a conventional mortgage. For an FHA loan, however, the minimum credit score is only 500. USDA mortgages require a score of at least 580.
A collection account can drop your credit score substantially. The exact amount of the decrease depends on several factors, but the higher your score, the further a collection account is likely to drop it.
Type of Collection Account
The type of collection account can sometimes make a difference. The bank’s underwriter clearly sees collection accounts in the “Public Records” section at the front of you credit report. If you have debt obligations like credit cards or auto loans in collection, you likely won’t get approved.
However, the underwriter may overlook certain types of collections, like medical bill delinquencies, 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.
- Experian: Paying off Closed or Charged off Accounts
- Federal Trade Commission: Fair Credit Reporting Act
- Lending Tree: What Credit Score Do You Need to Buy a House?
- Nerd Wallet: Credit Score Ranges: How Do You Compare?
- USA Today: Here’s What Americans’ FICO Scores Look Like. How Do You Compare?
- Credit Karma: How Debts in Collections Affect Your Credit
- How Long Does a Credit Card Settlement Settled With Prejudice Stay on Your Credit Record?
- How to Find Out if a Creditor Wrote Off Your Debt
- How Long Is a Charged Off Credit Card Bill on a Credit Report?
- After Bankruptcy, Can a Company Report You as a Charge-Off to the Credit Bureau
- What Does "Rescore" Mean on a Mortgage Loan Application?
- How to Get a Derogatory Report Removed With Payment
- How Does It Affect Your Credit When You Pay Off Debts?
- Can Creditors Remove Past-Due History?