Q: I’m a single mother, and have worked for several years to save up enough money for the downpayment on a house. I’ve paid every single bill on time for years now, and my credit score is in the high 700s. However, about four years ago, my now-ex-boyfriend abandoned a car I had helped him buy. My credit was better than his, so we put both of our names on the title and the loan so he could get a better rate and lower payment. When we split up, I took my car, and he took his, and he promised to keep the payments up. Of course, he didn’t pay the bill and the car was repossessed.
There is an open but old collections account for the $2,000 he failed to pay. I’m not paying it as a matter of principle — it is not really hurting my credit score. And I’m pretty sure he’s broke, so I can’t count on him to pay it, either. However, my mortgage broker says the bank will require the collection account to be paid off before they’ll let me buy a home. Is that correct? How can I get around this?
A: My mother once told me that she learned everything she ever needed to know about contract law from "Judge Judy." This irritated me just a tad bit, given that my mother’s daughter (yours truly) is a University of California, Berkeley-educated attorney. On the other hand, Judge Judy’s no slouch, legally speaking, and her constant stream of "don’t lend money to/do business with/co-sign for" your boyfriend advice might, indeed, have helped you avoid your current dilemma.
Who among us hasn’t made a costly mistake in life in the name of love? Think about — or shall I say rethink — the $2,000 it will cost you to clear up that collection as tuition: money you’ll pay in exchange for a life lesson.
Your mortgage broker is correct, and there’s no way to get around paying it unless you’re willing to cut off your nose to spite your face — especially since your name is on the title and the car loan.
Also, consider the value of the closure you’ll be gaining. While the collection might not be hurting your credit score too much right now, as long as it’s out there, the debt can be sold and resold to new collection agencies — an infinite number of times.
Every time it is resold, it resets the seven-year duration for which it can be reported on your credit report. Imagine if you go out to buy a car or have your home remodeled and the account has just been sold — as long as it’s out there it has the potential to spoil your plans to use credit unannounced.
That account is also keeping you connected to him, through your resentment and hanging on to your protest, based on "the principal" of the thing. Pay it, get it closed and let it go — wouldn’t you pay $2,000 to get rid of a guy who would treat your financial well-being with that level of disrespect and repay your favor with such contempt? That’s exactly what you’ll be doing, and getting rid of that force in your life is certainly worth $2,000. …CONTINUED
I’ve long said that buying a home presents a great opportunity to clean your financial house, so to speak. This is partly due to convenience — when else will you have all your credit reports, bank statements and check stubs right in front of you, providing easy access for you to check for fraudulent credit report activity, weed out any extraneous recurring charges that you no longer need, and re-evaluate whether your current tax withholdings are still appropriate?
The other reason the mortgage approval element of buying a home is a perfect time to wrap up financial loose ends is that, in many respects, you’ll have no other choice! And this is your situation. Long story short: if you’re getting an FHA-insured loan, the lender is highly unlikely — without extreme extenuating circumstances — to allow you to close escrow with any collection accounts still open.
With your credit score, they’ll likely allow you to go through the entire process. But at close of escrow, if not sooner, the escrow company will have to document that some of the funds in the escrow account are being disbursed to pay off that collection account.
What happens, you might wonder, if you simply refuse to pay it? The lender will simply refuse to fund your loan, is all. It’s up to you, but it certainly doesn’t seem to me that making your point is worth forgoing the benefits of homeownership for you and your children.
1. Get over yourself. (This is a phrase I use only when I care enough about an issue that it’s worth being perceived as rude to get the point across, so don’t be insulted.)
2. Get clear on your priorities. Scratch that — I believe you’re already clear. You know in your heart that buying your home trumps making a point to your ex, hands down. I think you wrote because you wanted "permission," so to speak, to do something about which you were somewhat conflicted, i.e., pay that collection off. You wanted someone to tell you that it is a good decision, even though it feels pretty bad in some ways. So here it is: pay it. It’s the only thing to do. Then, never put yourself in this situation again.
3. Make sure you pay it via escrow, or otherwise as advised by your mortgage professional. If you pay it on your own, by mailing a check, it might not register as paid soon enough for you to close escrow.
If it is paid through escrow, your lender will have the documentation it needs to let your purchase close, and who knows — you might even be able to get a closing-cost credit from the sellers that covers the $2,000. Anything is possible!
Tara-Nicholle Nelson is author of "The Savvy Woman’s Homebuying Handbook" and "Trillion Dollar Women: Use Your Power to Make Buying and Remodeling Decisions." Ask her a real estate question online or visit her Web site, www.rethinkrealestate.com.
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