Your credit score is a huge factor when buying a home, and collections can have a serious impact on where you stand. If you’ve got a collection on your credit report, you might be wondering: “How bad is this?” or “Can I still get a mortgage?” Let’s break it down so you know exactly what to expect—and what you can do about it.
The Immediate Damage of a Collection
As soon as a collection hits your credit report, your score can drop anywhere from 50 to 100 points—instantly. It doesn’t matter if it’s a $50 medical bill or a $2,000 phone bill—once it’s marked as a collection, the damage is done. It’s like getting a cut: the wound is there, and now you have to stop the bleeding.
Medical vs. Non-Medical Collections
There are two main types of collections: medical and non-medical. Medical collections are treated a little differently in the mortgage world. While they still hurt your credit score, most lenders (especially FHA, VA, and USDA) will ignore them when qualifying you for a loan. The impact is mostly on your credit score, which affects your interest rate—but it won’t necessarily stop you from getting a mortgage.
Non-medical collections, on the other hand, can be a bigger problem. These include unpaid credit cards, utility bills, auto loans, or anything else outside of medical expenses. If your total non-medical collections exceed $2,000, lenders have to factor in an expected payment of .5% of the balance when calculating your debt-to-income (DTI) ratio.
For example:
- You have $3,000 in unpaid collections.
- Lenders will add a $150 expected monthly payment (.5% of $3,000) to your DTI.
- That could lower how much home you qualify for—or push you over the limit completely.
What About Conventional Loans?
FHA, VA, and USDA loans are more forgiving with collections, but conventional loans aren’t as flexible. If you have open collections, you might not qualify at all. Even if you do, your interest rate will likely be higher because your score will be lower.
Should You Pay Off a Collection?
This is where things get tricky. A lot of people think, “I’ll just pay off the collection, and my score will go up.” But in reality, paying off a collection doesn’t always help your score—at least not right away.
Here’s why:
- If the collection is recent, paying it off might not boost your score much.
- If the collection is older, paying it can actually “refresh” the negative account, keeping it on your report longer.
- Some lenders might require you to pay it before approving your loan.
What Can You Do If You Have Collections?
If collections are dragging down your score, don’t panic. There are ways to work around them:
- Focus on new positive credit. Keeping credit card balances low and making on-time payments can help offset a collection’s impact.
- Look into a “pay-for-delete” agreement. Some collection agencies will remove the account from your credit report if you pay in full—but get it in writing first.
- Check for errors. If a collection is inaccurate or past the statute of limitations, call them and open dialogue on how to resolve the issue. Never “dispute” collection because that will also hurt your score in the long run.
- Get expert help. If you’re not sure what to do, we offer free credit repair to help you get mortgage-ready.
The Bottom Line
Collections can hurt your credit score and affect your home-buying ability, but they don’t always mean game over. The best thing you can do is understand how they impact your loan options and take the right steps to improve your situation.
If collections are standing in your way, reach out to us today. We’ll go over your credit report, walk you through your options, and help you move toward homeownership—no judgment, just solutions.
📩 Contact us at clemente@ramonespinozahomeloans.com or ramon@ramonespinozahomeloans.com to get started.
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