Collections And Late Payments
Past collections and late payments does not necessarily disqualify for a mortgage loan if there is a good letter of explanation. As long as you have a history of paying your bills on time but have had a streak of late payments due to extenuating circumstances such as unemployment, divorce, death in the family, or medical issues, you will still qualify for a mortgage loan. The mortgage lender will want a detailed letter of explanantion.
Do I need to pay off all of my collection accounts?
If you have collections and late payments on your credit report, do not just pay off old collection accounts without consulting with a mortgage loan originator. The loan officer will advise you on whether you need to pay off an old collection account. There are many mortgage lenders that will approve mortgage loans even if you have an open collection account. Paying off an old collection can be tricky and can lower your credit scores by more than 80 points and can destroy the chances of you qualifying for a mortgage loan. What happens when you pay off an old collection account or make partial payment on an old collection account, it will reactivate that collection account and the credit reporting agencies will recognize it as a new recent collection. I have seen credit scores plummet over 80 plus points right after a borrower has made a partial payment on an older collection account.
If you need to pay off a collection account
If the mortgage lender requires you to pay off a closing account, your loan officer will guide you on how to do it. You first need to settle the collection amount. Many collection agencies will settle for fifty cents on the dollar. Also, negotiate that you will only pay off the collection amount due if and only if they will do a pay for delete. What this means is that the collection agency will get the derogatory collection item removed/deleted from your credit report in lieu of you satisfying the collection amount. If they are not willing to remove the derogatory item, then do not pay the collection until prior to closing or at closing. Remember that paying a partial collection will drop your credit scores drastically and can jeapardize you mortgage loan.
Most mortgage lenders do not want their borrowers to have any late payments on their credit report for the past 12 months. If you have a late payment in the past 12 months, see if you can contact the creditor and see if they can get that late payment removed as a courtesy. If you have never been late and do not have a late payment history with a creditor, most creditors will remove a late payment as a courtesy. However, if you have a history of late payments, it might prove to be rather difficult in having the creditor remove the late payment. A late payment in the past 12 months is extremely a red flag under the mortgage loan underwriter’s eyes. You will need an excellent detailed letter of explanation on why you were late and the circumstances surrounding the late payment. Excuses like you forgot or my husband or wife forgot to pay is not an exceptable excuse and can hurt your chances on getting a mortgage loan approval.
Home Loan With Late Payments
Most mortgage lenders do not want to see their mortgage loan applicants have any late payments after a bankruptcy and/or foreclosure. Most banks will not even look at the mortgage application if they see that the applicant has had collections and late payments after a bankruptcy and/or foreclosure. For those who have had a history of collections and late payments after a bankruptcy or foreclosure, they need to seek the help of a mortgage broker who has dozens of correspondent lenders where they are more lenient and will except a detailed letter of explanation.