Will Collections Impact your Mortgage?
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?”
The answer might have a broader implication than what you
might think; let's spend a little time discussing it.
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.
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 new credit to
you 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 deal with the
issue head-on. 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.
If you’re unaware of bad debts
It happens a lot more than you’d think; people applying for a
mortgage are completely unaware that they have delinquent
accounts on their credit report. A common reason for this is
that collection agencies are hired simply because the lender
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.
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
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 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
If you have any questions about this or anything else
mortgage-related, please connect anytime! It would be a pleasure to work with you!