Mortgage Credit Score Clarification Questions

[tcovington]

Hi,

I'm currently trying to qualify for a FHA 203k loan in MD. I have a few questions that I'm hoping to get unbiased answers about. One mortgage company told me to pay on my collection accounts. Another told me it doesn't matter as they are from 2016-2018. So one of my questions is should I try to get a lower payoff and just pay them off? If I don't, will it be included in my DTI? Would it be bad to refinance a current loan I have to pay them off? How fast will paying them off raise my score? (I've already gained 70 points on one score in 6 weeks, but the other two will not go up) I'm using myFICO to see what on my report as the scores seem most accurate, so if I don't see it on myFICO should I not worry about it? I appreciate anybody taking the time to answer as I'm so lost. Thank you so much. 

[ShanetheMortgageMan]

Paying off collections from 2016-2018 most likely won't improve your scores any and has the potential to actually hurt your scores since the "date of last activity" can be updated.  Further, collections that are at least 7 years old shouldn't be on credit so the ones prior to 5/2017 should be able to be removed by contacting the credit bureaus and pointing them out.  Even collections are within a few months of the 7-year mark can sometimes be removed by the credit bureaus.

With FHA financing, if the total balance of non-medical collections is at least $2k then you either need to pay them off, make payment arrangements and the payment is included in your DTI, or 5% of the balance will be used as a payment to include in your DTI.

[tcovington]

Thank you for the information. I just went back to myFICO and looked at exact dates and you're right. The only ones there are from 2018. The oldest one is now April 2018. That leads me to a follow-up question. It could hurt if I pay it off, but if I don't it could be included in my DTI. 5% of the highest one is 253, so it could deeply impact my spending power. I'm buying my dads house and it needs so much help, so I need all the power I can get. I guess a secondary question is how bad can doing something with it now hurt? I truly appreciate your response. 

[ShanetheMortgageMan]

You're welcome.  You can just pay off that collection at closing and then it won't damage your score nor will it be included in your DTI.

If you wanted to handle it before, then you can look into doing a pay-for-delete where the collection account will be removed from your credit if you pay it.  You can read up on it at PFD Q&A, Examples, and PFD Success Stories.