Why do collection accounts have to be paid in full at the time of closing on a mortgage loan?

Answer 1

I am not a professional lender, but I think the short answer is, "Because it is the right thing to do." Think about it for a second. If a relative was asking to borrow $100,000 for a home worth close to the same amount... and that relative also owed your mother $2,432 but never paid her or was creatively slow in paying your mother, what would you do??? Wouldn't you want this relative to pay your mother first? Just on principal? In theory, it frees up payments - so they would be more likely to receive payment. I don't agree with this way of thinking because if a person can't pay their own collection accounts then there is a giant risk in lending large sums for a home. Additionally, I think all collection accounts should be paid in full before taking out a mtg. loan because there may be risk in those creditors laying claim to your home. This would put the mtg. lender in a sorry position in the event of a default. I am not sure on the law on this, it's just a guess. Good luck. Not all lenders require this. Shop around. Fact is, many, (most?) collection accounts never get paid, and banks are in it for the money, for what's right or wrong. So your not paying an old unsecured debt really has no bearing on the current secured debt a mortgage creates. The questions are, how likely is it that the mortgage company will make money off of you, and how likely is it that the mortgage company will lose money by dealing with you. Be prepared to pay a higher interest rate and downpayment, though.