Pay off Collections or Down Payment?

[pifhluk]

answered

[Anonymous]

I don't think you'll be able to get approved with those collections looming over you. Part of our closing terms required we pay off our one collection (at closing time) which was only $500 (that I'm totally bitter about because I know it wasn't our acct!!) I woukd be extremely surprised if you found someone to approve your mortgage while you have $30k owed in collections.

[pifhluk]

n/a

[InvincibleSummer3]

Paying off collections is a YMMV situation for sure. I had two on my credit report and was not required to pay them before closing. They're still there.

If it were me? I'd talk to whoever I was eyeballing to be my lender and see what they say. Pull your scores yourself and take a copy of your credit report so you can give them an accurate picture, and that way there's no hard pull on your credit while you're just getting questions answered.

[StartingOver10]

FHA has a limit on the gross amount of each collection allowed before they will require you to allocate a payment toward it in your DTI. I have to look for the thread. See edit below.

Give me a few minutes. I'm pretty sure Shanethemortgageman had a good thread all about it

EDIT:   I am posting the FHA mortgagee letter here so you can see it yourself. It is the individual collection amount if it is $2k or more must be subject to a capacity analysis. In this analysis if the debt is $2k or more, then 5% of the debt must be used for payment of that collection.  That can add up given your $30k in collections.

http://portal.hud.gov/hudportal/documents/huddoc?id=13-24ml.pdf

OP, what is the breakdown of each of your unpaid collections (amount owed)? Do you have a bunch of little ones under $2k or several large ones $2k and up? It will impact your DTI unless you have settled them (or pfd). Or otherwise paid them off.

I strongly suggest you negotiate PRIOR TO ever getting a mortgage pull. The CAs will see the mortgage inquiry and won't negotiate. They know all about lenders requiring collections to be paid prior to issuing a mortgage.

[pifhluk]

Thanks for the replies. Seems like the best route is to pull my own reports take them to a loan officer and see what they say. Is this an instance where I would want to use a broker? or do I just walk into my bank and ask? (I thought I read that banks will just tell you NO automatically if you don't have great credit etc.)

[Anonymous]

Yes, do not have any lender talk you into doing a hard pull right now.  Get your reports and go over everything.  Check your PM

[pifhluk]

I would also add to this thread that all my charge offs will be past SOL after November of this year. Does that change things at all?

[Anonymous]

Unfortunately, if the debt is over $2000, 5% must be used when calculating DTI for qualifying (if you don't have a repayment plan established). If all of the chargeoffs are over $2000, that means you'd have to add $1500 a month to your debt obligations. That would push your DTI far too high to qualify.

Are the chargeoffs in both of your names, or just one?

[pifhluk]

Just 1 name, but spouse only has 20k/year income (still in school) so I don't think she has enough income to qualify on own? even with 0 monthly debt and a good LTV.