How Delinquencies Can Affect Your Credit Report

Let’s face it, life doesn’t always go our way. Whether it’s an unexpected job loss, a medical emergency, or simply mismanagement of debt, financial consequences like collections, bankruptcy, and liens can seriously impact your credit and delay your getting a mortgage. But there is hope for getting past them. Here’s a closer look at these obstacles:

Collections

Most lenders will try to collect debts like mortgages, student loans, or credit cards up until 120-180 days late. Then they will write off the debt and send it to a third-party person or agency to collect it, and that’s when it hits your credit report. The longer a payment is past due, the more it can hurt your credit score. With serious delinquencies, you have three options:

• If the information is inaccurate, you can file a dispute.

• Wait seven years from the original delinquency date (the date the debt has gone past 120-180 days) for the information to drop off your credit report.

• Call your Mortgage Banker. Surprisingly, paying off a collection likely will not raise your credit score, and could even lower it. Let them run “score simulation” software to help determine whether you should pay collections or leave them alone.

Expert Tip

Medical collections—which you certainly didn’t choose to take on like a new car—are often weighted less in the credit scoring process and may not count against you at all if they are under a certain amount.

 Bankruptcies

Bankruptcy is a legal process that helps people deeply in debt get a fresh start by either liquidating their assets to pay their debts or creating a repayment plan. There are two types of personal bankruptcies: Chapter 7 and Chapter 13.

Chapter 7: This process eliminates all of your eligible debts. This bankruptcy has the most impact on your credit and will remain on your credit report for up to 10 years from the date it was filed. You cannot apply for a mortgage with a Chapter 7 until two to three years after its discharge.

Chapter 13: This bankruptcy stays on your credit report for up to seven years. Chapter 13 allows you to create a three-to-five-year repayment plan for some or all of your debts. You might qualify for a mortgage while in Chapter 13 (vs. Chapter 7) because you are demonstrating an effort to pay back your debts. Government-backed FHA, VA, and USDA loans let you apply for a mortgage as early as one year into your repayment plan if you’ve made your payments on time.

More good news: With time and work toward reestablishing your credit, the chapter 7 and 13 bankruptcy notations will affect your credit less and less. Here are steps you can take while you wait:

• Don’t miss payments, and make every payment on time going forward.

• Try opening a secured credit card.

• Become an authorized user on the account of a loved one with solid credit.

• Review your credit reports to make sure the bankruptcy information is correct.

• Keep your credit utilization ratio at 30% or less.

Liens

A lien is a legal right or claim by a creditor against property like a home or car. If the payment obligation isn’t met, the creditor can seize the asset. They fall into three broad categories:

Consensual liens: You enter these, like a home or car loan, voluntarily. These liens don’t hurt you as long as you make your payments on time. When the debt is satisfied, the lien is cleared and you receive the title.

Statutory liens: These liens are created according to the law and are involuntary. For example, mechanic’s liens are placed when you don’t pay a contractor for work performed, and tax liens are placed by the government when you fail to pay income, estate, or property taxes.

Judgment liens: These liens mean a court has decided in favor of a creditor against you and awards them a financial interest in your property.

Some liens, like mechanic’s liens, are reportable to credit bureaus; others, like tax liens, are not and don’t affect your credit scores. The bottom line is many liens are still a matter of public record, so they can easily be checked by your lender when approving you for a mortgage. Resolve your liens as soon as possible, and always be honest about your debts on your mortgage application.

No one wants bad debt on their credit report, but there are many resources to help you. Talk to your Mortgage Banker today!