Should you pay off a collection account before trying to get a mortgage loan?

should you pay a collection account before getting a mortgage loan

should you pay a collection account before getting a mortgage loanQuestion: I have an old account with a university which began in 11/97. Unfortunately, I never made any payments and interest accrued. Fast forward to present day and I am trying to purchase a home.

This is the last negative thing on my credit report preventing me from my first home. I had other blemishes on my credit report that I cleared up and paid in full. I did call the collection agency and tried to work out a settlement.

I did say to the collection agency I wanted to make an offer to settle the debt. They initially agreed to one settlement and called me back 6 days later and said the university would not accept my offer and I needed to come up with more money.

The collection agency never said while we were making an agreement that this was just a possibility and they would get back to me once they spoke with the university. I gave them my bank account information over the phone including a check number for the amount I negotiated for.

The collection agency gave me the option to withdraw my offer which I did one day later which they agreed to. I have put a stop payment on my check in case they try to collect. I contacted the university and my initial date for payment was 11/97. The last date for interest accrual was 8/04 and then it went into collections in 10/04.

I do have this in writing from the university on their letter head. What should I do? Am I in a position to dispute this since I never made a payment or is it too late because I attempted to negotiate a settlement and gave them my bank information?

Will this take me out of the statue of limitations? I live in Illinois and the collection agency is in New York. On my credit report it shows as 3/11 as date reviewed. I contacted them in 4/11 and prior to that haven’t heard anything from them because they didn’t have my updated address or contact information.

The credit report was printed on 3/23/11 through the company helping me obtain a mortgage and they pointed out to me on that date that I should contact them. The collection agency has the date opened as 10/2004. At this point should I just make the payment?

Answer:
First let me advise you to conduct any further negotiations with any collection agency in writing, in order to create a paper trail, instead of over the telephone. Second, NEVER give a collection agency access to your banking information period. Now, let’s get to your issue.

Re-Aging. The first action I would take is to find out the correct date the collection account is due to be removed by writing the credit bureaus. A simple letter would be: “Please provide me with the FCRA Compliance/Obsolescence Date and the month and year this item will be removed from my credit report.” Once you get this information directly from the credit bureaus you will know whether this account has been Re-Aged.

Without looking at your report, I believe the current dates in 2011 related to the account are the date of last activity, which could be an account review by the collection agency. The date of last activity is unrelated to the date a negative account is due to come off your credit reports which is the FRCA Compliance/Obsolescence Date.

Dispute. I would not attempt to dispute the account since you have made contact with the collection agency. I’m not saying it would not work but at this point a verified dispute may actually lower your credit score because it would update the date of last activity just like the account review updated the date of last activity. Older, inactive collection accounts have less effect on your credit score but once a collection account is disputed and possibly verified as accurate by the collection agency, the date of last activity appears more recent and your credit scores may decrease.

Statute of Limitations. The statute of limitations determines how long you can be sued for an unpaid debt. You will have to check your state’s laws in order to determine if the statute of limitations re-starts once you pay a collection account. But don’t get the state’s statute of limitations confused with the credit bureaus’ 7.5 year reporting period. The 7.5 year reporting period should not change, if it has changed, Re-Aging has occurred and this is a serious violation of the Fair Credit Reporting Act.

Paying the Collection Account. Since you are attempting to get a mortgage loan, it is highly unlikely a mortgage lender will allow a collection account to go unpaid. Paying the collection account will more than likely be a condition for getting the mortgage loan. Your concern should be the timing of payment. I would arrange to pay the collection account at the closing of the home purchase. Have the mortgage lender include payment in the closing costs.

It is somewhat unknown as to exactly how the credit scoring model works but if you were to pay the collection account prior to getting the mortgage loan, the date of last activity would be updated to a current date. Even though the account balance would be $0 once the payment is made, your credit reports would look as though you have a RECENT active collection account which is a lot more derogatory than an older collection account with an unpaid balance. You don’t want to take any action now that may lower your credit score before you get the mortgage loan.

The only circumstance I would pay the collection agency prior to getting a mortgage loan is if the collection agency agreed, in writing, to delete the account from my credit reports. The only issue with a pay for deletion is that some collection agencies will not negotiate a lower settlement amount if they agree to the pay for deletion. You may have to pay the entire amount if a pay for deletion is negotiated.

The bottom line is you are on the verge of being a homeowner. This is great! Don’t let a collection account get in the way of homeownership and don’t spend a lot of time wondering what you could have done differently in negotiating with the collection agency.

Get your lender to set up payment at the closing of the mortgage loan and move on. Once you become a homeowner and make at least 6-9 months of timely monthly mortgage payments, your credit score will get a big boost.

 

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