Let’s look at the terms “collection” and “judgment.” A collection is a debt that the creditor has been unable to collect from the person to whom they have provided goods or a service. Often these are medical related. A judgment is a legal and public ruling that requires one person to pay another for something.
The mortgage program you choose to finance your home will have guidelines that will determine what happens with each type of credit item.
Conventional mortgages are those that use guidelines from Fannie Mae and Freddie Mac. In their March 3, 2021 guidelines, they state that typically, and there are exceptions, collections don’t need to be paid back, but judgments do, either before or at closing.
FHA has a different approach. Their guidelines, effective November 18, 2020, state that any derogatory credit accounts over $1,000 may need to be paid back. Judgments with FHA are either going to be paid off before closing, or if there is a preexisting agreement with the creditor and those payments have been made on time, that agreement may be able to stay in place.
Before paying off any collection, see how old it is. Some collection accounts, especially smaller and older ones, have less impact on your scores over time.
When you pay them off, you are “updating” them on your credit report, and they may temporarily drop your credit scores.
Let me help you review your collections and judgments, and let’s put together a plan to get you in a buy-ready position.