NJ First-Time Home Buyers


Can I Qualify for a Mortgage with a Large Collection/Derogatory Debt on My Credit?

Can I Qualify for a Mortgage with a Large Collection/Derogatory Debt on My Credit?

Can a home buyer qualify for a mortgage with a large collection-type account on their credit, such as a car repossession or a judgment? And if so, does the buyer have to pay it off before settlement?

Bumble-Boy Loan OfficerThe answer is YES a buyer may qualify for a mortgage with a large derogatory/collection account on their credit report. If the buyer has to pay it off before or at settlement (or not at all) mainly depends on the underwriter/lender.

When it comes to a collection-type account, lenders will vary as to what exactly has to be done to qualify for a mortgage. Some loan officers will tell a buyer to pay off all collection accounts or anything at all derogatory on their credit. This can at times be some of the worst advice for a home buyer. Here is why ... 

  • Paying off a collection account can drop your credit score, and we are talking A LOT of points.
  • Not all collections/judgments (etc.) are required to be paid off.

Buyers: Get approved FIRST - Then see what the requirements are to go to settlement. Even if a lender requires an account to be paid off, it can almost always be paid at settlement. This is better for the buyer as they can save the money required and it won't drop their credit score before settlement.

There is another potential option: Sometimes a buyer is allowed to bypass paying off the entire collection if they can clearly document satisfactory payments on the account for 12+ months. In this case the monthly payment is calculated into the buyer's monthly installment debts.

TIP: If a loan officer quick looks at your credit report and tells you to pay every collection and/or derogatory account off, and then come back to him/her to get qualified, then you should probably find another loan officer to work with, one who has a much better grasp on the realities of the credit scoring model.

Steve Kappre is a mortgage loan officer in New Jersey. For more info or questions feel free to contact Steve.

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Comment balloon 7 commentsStephen Kappre • August 23 2010 10:38PM


Good information.  This can certainly be helpful to some of my clients that might be falling behind on some payments trying to keep the home. 

Posted by Don Sabinske, Sabinske & Associates Inc. (Don Sabinske, Sabinske & Associates Inc.) over 10 years ago

Good to know and I agree some mortgage officers just discredit a potential customer because they have a collection.  Thanks for clarifying.

Posted by Brittany Stewart, Making Dallas Home (Luxe Realty Group) over 10 years ago

Don - It can all be very complex. I just hate to see bad information given out.

Brittany - Some LO's won't put forth any effort for people with less than perfect credit.

Posted by Stephen Kappre, Helping You Home (KW Hometown) over 10 years ago



I had heard that paying off collections can drop your score.  I have not run across a lender that will let a collection go unpaid, even at closing.

Posted by Justin Dibbs, REALTOR® - Ashburn Virginia Homes for Sale (Pearson Smith Realty) over 10 years ago
RS2Xxm BION I'm impressed! Cool post!
Posted by Darrance almost 10 years ago

For FHA Loan, their  Website says that minor collections don't necessarily have to be paid off, but Judgements do need to be paid in full prior to closing - and that deliquencies on certain kinds of debt - federal debt which includes tax liens, student loans, etc. are not eligible for a FHA loan.

Posted by Kim Davis (available for employment) over 9 years ago

I am not premoting anything but I just did a video on how to get collections off your credit report for free...  check it out here http://www.thecreditguy.tv/how-to-remove-collections-from-a-credit-report-for-free/

Posted by Dave Sullivan, Michigan Realtor with an investor viewpoint (Real Estate One) almost 9 years ago

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