January 2nd, 2018 11:51 AM by Bob Rutledge
At the start of many mortgage application I hear my borrowers tell me that they had started the process of 'fixing' their credit BEFORE they spoke with me or any other mortgage lender. This is a mistake that has hurt so many potential home buyers. This is especially true when it comes to collections on your credit report.
have done a great job over the years of convincing consumers that paying off
collections will raise their credit scores. Many are actually surprised to
learn that paying off collections will actually LOWER their credit scores.
Collections are usually reported on the credit as a “9” status or collection
account. This means the account has already been "written off" and
assigned to collections by the creditor. Once an account is reported this way
on the credit report, the damage to the credit score is irreversible, unless
that item is removed completely from the report.
If the account is paid off, the collection company reports that the account now
has a $0 balance, but they do not usually delete the item off the report. The
account has already become a collection, and the risk of the consumer
defaulting on another account is already very high, due to that collection.
So their credit score will not go any higher if it is paid off, because paying
off a collection after the fact, doesn't lower the risk of defaulting in the
However, the DATE OF LAST ACTIVITY is updated to the date the account was paid
off. So if that account was sent to collections 3 years ago, the date of last
activity is 3 years old and the impact to the credit score is not as much. But
if the consumer pays off that collection today, they just update the date of
last activity to today's date, many times causing the scores to go DOWN as a
Crazy isn't it?
Also, if you have medical collections most mortgage programs will not require you to remedy medical collections, in essence....we ignore them. Yes, they may be hurting your credit scores, but there are usually other methods available to you to increase your scores.
Before you start doing your homework to purchase a new home please contact me or another mortgage professional. Allow us to pull your credit report for you and to discuss what is the best course of action to take, you may be surprised how easy it really is to get your credit scores higher.