Can Collections Stop You From Getting a Mortgage?

You probably think that if you have collections on your credit report that you can’t get a mortgage. Luckily, that’s not the case, but it will depend on the lender and their rules.

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What is a Collection Account?

First, let’s look at the definition of a collection account. Basically, it’s an unpaid debt that the creditor finally gave up on, assuming that you wouldn’t pay it. The creditor then sold the debt to the collection agency hoping that they would be able to get the payment.

If you have collections on your credit report, it shows future lenders that you are financially irresponsible or at least that’s what they may think. Of course, this isn’t always the case. Sometimes things happen and you can’t help but default on your debts. The best thing you can do if you have collection accounts is give the lender an explanation.

What’s Your Reason

If you have collection accounts because of circumstances outside of your control, such as you fell ill, or your company closed, there’s nothing you could do about it. You need to let potential lenders know that this is the case. It helps if you can provide them with proof of the occurrence that forced you to let the account go to collections.

What’s the Status of the Collection?

When you apply for a mortgage, lenders will look at your collections and determine how to proceed. Usually if the collections are medical, lenders overlook them. They realize that a lot of medical collections are due to issues with insurance or miscommunication. Because medical needs are imperative, lenders often let these collections go.

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If you have collections from any other type of debt, though, you may have to pay the collection off in full before you can get a mortgage. This will vary by lender, but it’s good to prepare yourself to pay it just in case.

Have you Been Paying?

One way you can get around a collection is if you have a payment arrangement and have been paying on it for the last 12 months. Your lender will require proof of your payments either from the collection agency or with your canceled checks first. They will then determine the status of the collection before making a decision on your loan.

Removing Collections From Your Credit Report

If you do have collection accounts on your credit report that you’ve either paid off or they aren’t valid, you need to write to the credit bureaus. You should provide proof that the collection is no longer valid. The credit bureaus will have 30 days to verify the collection with the creditor or they must remove it from the credit report.

Each lender has different requirements regarding collections. Some lenders won’t accept any borrowers with collections. Others will accept them as long as you have a payment arrangement or some other agreement. If the collections are small and don’t affect your credit score, lenders may just overlook them altogether. If you have collections, you may have to shop around with different lenders until you find one that will handle your collections the way you need.

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