Should I pay collection accounts for mortgage at record low rates?
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Scenario: I’ve had 3 negative entries (collection items) on my credit report. I have worked hard to repair my credit since then. Except the 3 negatives, I could remove all other bad items and this boosted up my middle score from 500 to 695. I’ve been in the same job for 10 years and have an income worth 70K annually. My wife has a pretty good score worth 750 and makes around 25K a year. I haven’t been late on any of my payments for the past 7 years. I do have credit card debt worth 1K. I have a car loan with no late payments. The mortgage lender I applied to asked me to provide a letter of explanation for the 3 negative entries. I’ve decided to send in a well worded letter. Do you think that’s enough or is it necessary that I pay them off? What if it takes longer? Just thinking that I won’t miss the current low mortgage rates….
Solution: It’s good that you’ve been able to raise your middle credit score to 695. It’ll help you to qualify for a better deal on the mortgage.
Even though you provide the lender with a letter of explanation, it’s better if you can pay off the collection items. This is because you may lose your chances of qualifying for a mortgage loan if you don’t pay off and get rid of the accounts in collection.
Most lenders are actually unwilling to offer loans to anyone having accounts in collection. So, it’s better to contact the collection agencies and work out a payment agreement for those accounts. I don’t think it’ll take longer to pay off the accounts if you have the required funds. Now, in order to qualify for a mortgage, you’ll need to pay off the collection accounts in full. Prior to paying off the collection accounts, request the collection agencies to accept a “Pay for Delete” agreement. This is to make sure that the accounts will be removed from your credit report as soon as you pay off the dues.
Considering the other factors, your employment history is quite impressive. Your annual income is also good enough to help you qualify for a mortgage. If you have plans to include your wife’s name on the mortgage (or home loan), I’m sure it will help you qualify for a better deal. In fact, your wife can sign on the deal as a co-borrower. This is because her credit score and income level are good enough to help you both get a home loan at suitable mortgage rates.
Mortgage rates are currently (May, 2009) in record lows with 30 year fixed mortgages being offered at national average rate of 5%. Alternatively, you can opt for 15 year fixed loans having mortgages rates (national average) worth 4.7%. However, if you’e looking to stay on your property for a short term, say 5-6 years, then you may like to take advantage of the low initial rates of an adjustable rate mortgage (ARM). Just make sure you know how an ARM works, what’s the index linked to your loan and how the rate cap limits the interest rate on your loan.
To make sure that you get the best rates available in the market, you need to do loan shopping with a number of lenders. This will help you to compare mortgage rates offered by lenders, mortgage companies and banks. Besides, you need to compare the overall loan costs as well. Only then you’ll be able to choose the best offer available in the market.
One more factor that you need to consider is your Debt-to-Income ratio. It should be somewhere around 36% if you’re going for a conventional loan and 41% if you’d like to choose an FHA mortgage.
She is the Community Mentor of MortgageFit and has been contributing her suggestions to the Community since 2005. Not just that, she has also made notable contributions through the various articles written on different subjects related to the mortgage industry. Few of her popular articles would include names like ‘Mortgage that you can afford’, ‘Mobile Home Loan with Bad Credit’, and How much mortgage can I borrow?’ Article Source:http://www.articlesbase.com/mortgage-articles/should-i-pay-collection-accounts-for-mortgage-at-record-low-rates-1652048.html
