Paying Off Collection Accounts Before Refinancing
If I were you, I would apply for the refinance loan first to see what happens. Scratch that. The absolute first thing I would do is check my credit score. That way, you would know where your credit stands going into the mortgage application process. If you get approved and it all works out well (in spite of the collection items) ... great!
If you get declined for the refinance loan on the basis of your credit score, then you obviously have some work to do. Paying off an old collection account does not always improve your credit score. In fact, it can sometimes have the opposite effect. The FICO scoring model, which is the one used by most lenders, is a quirky thing. By paying off an old collection account, you are also making that account more recent. And many experts claim that this can lower your score.
Of course, there are just as many "experts" who claim that paying off an old collection item will not change your score much at all. So there's that.
Here's what the folks at MyFICO (creators of the FICO scoring model) have to say about this subject: "At myFICO we always recommend paying off your legitimate debts, and paying off old collections won't hurt your FICO score." -And if they're not experts on their own scoring system, I don't know who is!
There are many variables to be considered on a case-by-case basis. So I can't offer you any predictions. I'm just saying there's a possibility you could hurt your score (if only slightly) by paying off a collection account.
Like I said, if I were in your situation I would check my credit score first. If it was good, I would go ahead and apply for the refinance loan. When a lender declines you for a loan, they usually tell you the exact reasons why. So even if you get declined, you'll get something out of it.
Related Q&A sessions:
Hope that helps. Good luck.
Labels: scores
posted by Brandon at
7:08 AM
