Accounts which have been submitted to collection agencies will show on your credit report and can have adverse effects in your qualification for a mortgage.
While some lenders may not require you to pay off a collection account, that does that mean you should keep the account in collections. If you have the additional funds to pay off the collection account, it is generally best to do so and get that negative acccount removed from your credit report.
Paying on old collection accounts can lower your score by renewing the date of last activity. Use caution when deciding which debts to pay.
Once a collection account it paid it can be helpful to contact the company and ask for it to be removed. This is most effective when done in writing. Your mortgage professional can help in providing the standard request forms for this type of situation. Some companies are not adverse to removing the negative mark if the debt is satisfied.
If the collection is old enough, it will drop off the consumer's credit report. The time frame is 7 years from the date of last activity on that account. If the account has been on the credit report for more than 7 years, it can be removed by contacting the credit bureau.
Some collection account recovery companies will keep reporting bad accounts so the 7yr period starts over constantly hurting the credit file...Also, when paying off a collection from the information on the credit file make sure by paying he "collection company" and not original holder of debt that it will satisfy both the collection and the charged off account...The original company may not care that you paid off a collection company, they didn't get the money...
Collection accounts may or may not have to be paid off when obtaining a new mortgage loan. This will depend upon the lender and the particular loan program that you are applying for. It is important that you inform your Loan Officer as to your desires regarding the paying of such accounts so that a loan program which accomodates your wishes is selected. This is one of the many reasons to make sure you are working with an experienced mortgage professional who has a grasp on these types of issues rather than just whomever happens to quote you the lowest rate.
Most lenders have specific guidelines as to how much they will allow to remain open in collection accounts in order to do a loan with them. Many sub-prime lenders will allow a borrower to have up to $5,000 in open collections and they will still allow you to get a loan with them. Some subprime lenders will allow a lower total amount of collections than 5k and others will allow a higher amount, or even an unlimited amount as long as none of the collection accounts affect the title of your home.