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I Paid Off an Old Debt But Can’t Get a Mortgage

By on February 2, 2015

“Dear Steve,

I made a move to another state for a new job in early 2007. By the end of summer in 2008 I was laid off from my job. I received unemployment pay but I was out of work for more than a year and a half.

At the time I was laid off I had some credit card debt. My unemployment pay was so far below what I had been earning that I had no choice but not to pay on the credit cards.

Fast forward to the beginning of 2010. I had found a full time job and made calls to each of the credit card companies that I had debts with (there was 4 in total). Two of the cards I was able to pay them off at that time, one card agreed to taking a monthly payment for 3 years, however the last one (already in collections) was not willing to work with me on making monthly payments.

They wanted the balance paid off in less then a years time (it had a balance of over $8,000) and they wanted almost half of the balance paid up front. I could not afford too.

Another year or so went past when I started getting calls from the new collections company (the debt had been sold to a new collection company). I was able to work with them to have the agreed upon debt paid off in a year.

I am now able to buy my first home. The problem that I am having is the debt (although it shows a zero balance) is showing up when the bank pulls my information. My lender is wanting a letter from the collection company stating that this debt has been satisfied.

I have called the company multiple times but they have not/will not send me a letter stating that the debt is satisfied.

Is there anything else I can do to make them send me the letter or do I just hold off on buying a property until this falls off my credit report?

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Jamie”

Dear Jamie,

It seems like there are several things you could do but ultimately the best thing to do is whatever satisfies the lender.

You could get a copy of your consolidated credit report which shows all of the major credit bureaus on it. Not all credit bureaus report all debts so once you figure out who is reporting the old account, you could follow the dispute policy of the credit bureau reporting the old debt and hope they then remove the account.

You could ask the lender to write to the company and judge for themselves what the lack of a response means,

You could provide some sort of proof you paid the debt. This could be cancelled checks or a statement showing it being paid off.

It is also possible the debt is no longer with that company that reported the debt and they might have been a third-party collector. In that case they would not be able to send you a letter. You might want to look on your credit report to see if there was another entity that might have actually been the debt owner and ask them for a letter.

Ultimately this just comes down to a loan underwriting policy and procedure. So what if you asked your lender if you could talk to the person handling your file and brainstorm if any of these ideas would work for them.

Please post your responses and follow-up messages to me on this in the comments section below.

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About Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

7 Comments

  1. Joe Parsons

    February 3, 2015 at 10:38 am

    Steve, I agree with most of your advice, but I’d like to offer a couple of comments that may be helpful. I’m speaking from the standpoint of twenty-five years as a mortgage lender.

    It appears to me that Jamie’s main problem is that he has an open collection—although having been on unemployment for so long could affect the way an underwriter views his earning history. If he has not been in the same line of work for at least two years (he doesn’t say whether he has made a career change), that would be a problem.

    No lender will take the initiative to call a creditor to see if a loan has been repaid. They will require a credit supplement to document the fact. Jamie’s loan officer would order that from the same company that generated the credit report. The credit report vendor may be able to issue the credit supplement based on documentation (canceled checks,
    satisfaction letter, etc.) that Jamie would supply.

    If the creditor is unresponsive, Jamie could dispute the account, as you suggest. If the creditor doesn’t respond within 30 days, the account will come off his report.

    Most mortgage underwriting today is automated, using either Fannie Mae’s Desktop Underwriter or Freddie Mac’s Loan Prospector. Although there is the possibility of manual underwriting with some loan programs (like FHA), it is Jamie’s loan officer who should be quarterbacking the whole process. If his LO isn’t doing that for him, it’s time for a new loan officer who will work for him.

    Joe Parsons
    Senior Loan Officer
    PFS Funding
    Dublin, CA

    • Steve Rhode

      February 3, 2015 at 10:53 am

      Hi Joe. I agree completely with your observations. But all we can do is use the information provided to give a response.

      Of course the bigger issue here is if the dispute is filed and the reporter comes back saying it is accurate. That is a chronic problem. It doesn’t fix the issue. Happens rather frequently in my experience. You’ll have to let us know what your experience is from your side of the fence.

      I completely agree Jamie’s loan officer should be driving this process.

      • Joe Parsons

        February 3, 2015 at 11:14 am

        If Jamie is willing to share any details, I can weigh in with some suggestions. Specifically, it would be helpful to know what kind of mortgage he’s looking for–FHA, VA or conventional? Does he have any accounts that are shown as currently delinquent?

        If he is seeking an FHA loan (3.5% down), it can be manually underwritten, but the criteria are a bit more restrictive with regard to debt to income ratio.

    • Justme

      February 3, 2015 at 2:48 pm

      I (Jamie) should let you know I am pre-approved (I haven’t found the house yet) but I wanted to make sure I wouldn’t have any issues with closing. I will contact my lender and let him know I haven’t had any luck with getting a letter from the Collection agency and see what he has to say.
      I am looking at FHA & Conventional (the rates are different for each).

      • Joe Parsons

        February 3, 2015 at 3:03 pm

        Contact your loan officer and ask him whether he or she ran DU or LP to give you a preapproval. Or, better yet, ask if an underwriter has actually reviewed the file. That will tell you whether you need to provide documentation that the collection account has been satisfied. It is a simple matter for the LO to get a credit supplement from the credit report vendor showing the collection account has been satisfied.

        Both FHA and conventional offer loans with very small down payments. FHA requires 3.5%, and Fannie Mae and Freddie Mac have 3% down loans. Both will require mortgage insurance, but you can get the conventional MI removed once you have at least 20% equity in the property. FHA MI is there for the life of the loan.

        Assuming a 97% loan, conventional MI will cost between 1.05% (760 FICO) and 1.48% (620 FICO. FHA is .85% monthly, but there is a 1.75% initial premium, added to the base loan amount–and you can never remove it without refinancing. Assuming you can be approved for either loan program, which one you choose should be a function of your credit score. A lower score favors FHA, because there are fewer adjustments to MI and rate.

        Your loan officer should be able to explain your choices to you and give you specific numbers.

        Good luck!

        • Steve Rhode

          February 3, 2015 at 3:16 pm

          You Rock!

          • Joe Parsons

            February 3, 2015 at 3:35 pm

            Yeah, I know. :)

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