Does One Credit Mistake Mean No Mortgage?

Dear Dr. Don,

My husband's credit score is 689, and mine is 596. I recently had a $1,200 collection appear on my report, dropping my score almost 100 points. We want to buy a home, and we have 20% to put down. Is a Federal Housing Administration loan the only way we can go now that I've taken a hit to my credit score? I want to pay the $1,200 in full to the collection agency, but I wonder if that will make matters worse. The collection agency is working on a credit card debt that would have dropped off in October 2007. Any advice?

Thank you kindly,

- Sue Shellacking

Dear Sue, I recently attended a mortgage conference where industry leaders discussed how people with lower credit scores like yours face limited choices in mortgage lenders. The FHA loan program is the most viable option for your hope to find financing. You won't need to put 20% down. But you'll be paying mortgage insurance premiums that wouldn't otherwise be necessary had you been able to secure conventional financing with 20% down.

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With the exception of a Chapter 7 bankruptcy filing and some judgments, negative information sticks on your credit report for seven years from the time first reported. That's true regardless of whether the item is turned over to collections. Just paying $1,200 to the collection agency would not make the negative history go away.

I'm not sure what you mean when you say the debt would have dropped off in 2007. Credit card agreements often have statute of limitations provisions restraining the credit card company's ability to sue you for payment past a certain date.

Often a collection agency will make a last-ditch effort to collect on a debt prior to when the statute of limitations takes effect. By making a payment, you could restart the clock on the statute of limitations. Laws vary from state to state. A debt collector that threatens to sue you over a debt beyond the statute of limitations in your own state would likely be in violation of the Fair Debt Collection Practices Act.

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