A question that comes up from time to time when discussing mortgage financing is, “If I have collections showing on my credit bureau, will that impact my ability to get a mortgage?” And as the answer might have a broader application than what you might initially think, it’s worth spending a little time discussing.
Collections accounts are reported on your credit bureau when you have a debt that hasn’t been paid as agreed. Now, regardless of the reason for the collection; the collection is a result of delinquency, it’s an account you didn’t realize was in collections, or even if it’s a choice not to pay something because of moral reasons, all open collections will negatively impact your ability to secure new mortgage financing.
Delinquency
If you’re really late on paying on a loan, credit card, line of credit, or mortgage, and the lender has sent that account to collections, as they consider it a bad debt, this will certainly impact your ability to get new mortgage financing. Look at it this way, why would any lender want to extend you new credit when you have a known history of not paying your existing debts as agreed?
If you happen to be late on your payments and the collection agencies are calling, the best plan would be to directly deal with the issue. Settle the debts as quickly as possible and work towards establishing your credit. Very few (if any) lenders will even consider your mortgage application with open collections showing on your credit report.
Bad Debts You’re Unaware Of
It happens a lot more than you’d think; people applying for a mortgage are completely unaware that they have collection accounts on their credit report. A common reason for this is that debts get transferred to collection agencies simply because they can’t reach someone.
Here’s an example. Let’s say you’re moving from one province to another for work, you pay the outstanding balance on your utility accounts, change your phone number, and make the move. And while you think you’ve paid the final amount owing, they read your meter, and there is $32 outstanding on your bill. As the utility company has no way of tracking you down, they send that amount to an agency that registers it on your credit report. You don’t know any of this has happened and certainly would have paid the amount had you known it was due.
Alternatively, with over 20% of credit reports containing some level of inaccuracy, mistakes happen. If you’ve had collections in the past, there’s a chance they might be reporting inaccurately, even if it’s been paid out.
So as far as your mortgage is concerned, it really doesn’t matter if the collection is a reporting error or a valid collection that you weren’t aware of. If it’s on your credit report, it’s your responsibility to prove it’s been remediated. Most lenders will accept documentation proving the account has been paid and won’t require those changes to reflect on your credit report before proceeding with a mortgage application.
So how do you know if you’ve got mistakes on your credit report? Well, you can either access your credit reports on your own or talk with an independent mortgage advisor to put together a mortgage preapproval. The preapproval process will uncover any issues holding you back. If there are any collections on your bureau, you can implement a plan to fix the problem before applying for a mortgage.
Moral Collections
What if you have purposefully chosen not to pay a collection, fine, bill, or debt for moral reasons? Or what if that account is sitting as an unpaid collection on your credit report because you dispute the subject matter?
Here are a few examples.
- A disputed phone or utility bill
- Unpaid alimony or child support
- Unpaid collections for traffic tickets
- Unpaid collections for COVID-19 fines
As you know, our government has imposed regulations to help stop the spread of COVID-19 and has issued fines to those who gather and defy government regulations. If you receive a fine, choose not to pay it for moral reasons, and if it goes to collections, it will negatively impact your ability to get a mortgage.
The truth is, lenders don’t care what the collection is for; they just want to see that you’ve dealt with it. They will be VERY reluctant to extend new mortgage financing while you have an active collection reporting on your bureau.
So if you decide to take a moral stand on not paying a collection, please know that you run the risk of having that moral decision impact your ability to secure a mortgage in the future.
If you have any questions about this or anything else mortgage-related, please contact me anytime!