Most prospective home buyers will pay for their properties by taking out a loan. When shopping for a mortgage, buyers will generally receive offers from a number of lenders and select the one with the best terms. The terms offered by the lender will depend on a number of factors, including prevailing rates of interest, the lender's policies and the borrower's credit rating. Open collections accounts drag down an individual's score, which could prevent them from qualifying for a loan.
Approval Process
When considering whether to offer a loan to a prospective borrower, a lender will consider a large amount of information related to the borrower's financial history, including his current credit report and its resultant score. A person's credit report includes mentions of all outstanding collection actions. The lender may factor in the presence of a collection action specifically when considering whether to approve the borrower, or he may simply factor in the borrower's credit score.
Collections Accounts
A collections account is an indication that the creditor to which an individual owes money has hired a debt collector to seek payment of the money. Such accounts are generally only opened by a creditor when an account has fallen several months delinquent. Collections accounts may be opened for a number of reasons -- for example, a genuinely delinquent loan or simply a disagreement over a bill. However, all collections accounts will drag down a person's score.
Effects
The presence of a collection action may cause a lender to consider a potential borrower to be at higher risk of defaulting, thereby causing him to offer a loan only at a higher rate of interest or not at all. However, if the collections account is on an individual's credit report for a justifiable reason -- say, the creditor has made a mistake or is acting dishonestly -- the lender may be willing to ignore it.
Solutions
In order to prevent a collections account from negatively affecting his score and affecting his chances of having a mortgage approved, an individual must settle up with the lender who has opened the collections account. Generally, the individual must either pay what he owes or reach some alternative settlement. The creditor can then close the account. This closure will help boost the individual's score and improve his chances of receiving a mortgage with good terms.
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