A very hot topic over the years has been in regards to collection accounts and whether they should be paid off or whether nothing should be done at all. There are many different ways to answer this question about credit collections that will be discussed throughout this page. Overall, each persons situation is different and unique and the right answer may simply have to do with your current finances, and your future goals.
If the collection account is invalid for any reason, you may wish to seek the advice of a loan officer or credit counselor on the possible impact of successfully filing a complaint to remove the collection account from your report.
If you have credit card collections and are trying to get a mortgage you may need to pay them off to get a low conforming interest rate. How ever most sub prime lenders will not require you to pay of collection accounts. If the collection accounts are very high you may actually benefit from leaving them open rather then pay them off. The collection accounts will come off your credit report after 7 years and the difference in payments between the sub prime rate and conforming rate might still be less then the collection account payoff amount in that time span. If they are only a few thousand dollars however paying them off will benefit you and your mortgage interest rate
If you have a collection account that is over 2 years old, you may not want to pay this account off prior to closing. Typically, collection accounts more than 2 years old do not have a big effect on your credit score. Paying off that account will actually lower your score as the new activity date on your credit report is reflected in the payment.
Another strategy to payoff collections through escrow from the proceeds of your refinance. Some lenders may require that collections be paid off, but will allow you to pay them off when funding your account. That way your credit report will be effected after the refinance transaction has occurred.
Remember, a professional broker should be telling you how your credit profile, including collections, affects your ability to get a mortgage. It is your decision to pay, pay later, or not pay debts that are accurate and listed on your credit report.
It is important to note that when you contact a collection agency and barter down a payoff amount that it will show on your credit report as "settled less than amount owed". If an account has just gone into collections, try contacting the original creditor and paying them directly.
Contact the collection agency prior to paying off any balances. Often they will settle the balance for a significant discount.