I'm gonna bump this one up to tell everyone that I was able to refinance my mortgage while refusing to pay off collections on my credit reports. I refinanced into an FHA mortgage, too!
I have four unpaid medical collections on my credit report totaling almost $5000. They have been there since January, 2006. I also had one collection from November, 2009 for a $350 AT&T bill that I disputed. My scores at the time were all in the 660s.
I went through the entire refinance process from start to almost finish, and that's when the mortgage underwriter sprung on me the need to pay off the collections, either from the proceeds of the refinance, or on my own prior to closing.
I steadfastly refused. I submitted as the basis of my refusal the reason I declined to pay the AT&T collection and the steps I planned to take regarding that collection (I just sued the JDB this past week for TCPA violations), and the fact that the medical collections from 2006 were all time-barred from court action. I told the underwriter that I would rather not refinance if it meant paying those collections.
They bought it, and apparently the FHA did, too, because they had to approve the variance, according to the underwriter.
Here is what I believe worked in my favor:
1. I did not need to refinance my mortgage, and I let them know that. I said specifically, "I will walk away from this refinance before I pay them." My previous was 5.75% and my new was 4.75%. Over the three years it would take to get the collections to fall off my reports, my interest savings would have been $4000. With collections totalling $5000, and closing costs in the $3000 range, there was no impetus for me to refinance, and they knew it.
2. The medical collections were over four years old and past the SOL in my state. Based on last activity dates, the underwriter knew that there was no way the CA could file suit, obtain a lien, and force the lender's hand.
3. The other collection, an AT&T collection in dispute, was for $350. Apparently that wasn't large enough for the underwriter to worry. I suppose if push came to shove there and I were sued by a CA or JDB on that collection, the lender would just pony up the few dollars to make sure they retain the senior lien position. I've seen that done before.
4. There were three months between my initial hard pull and my closing. In that time, no new CAs or OCs came forward with TLs in collections or negatives. (There were none, anyway. Everything had been paid on time since 2006.)
5. My debt-to-income ratio was excellent, as I was borrowing much less than I could afford to borrow.
6. My loan-to-value ratio was under the limitations for FHA enough that I did not hit it even though I financed my closing costs.
So, it's possible. And apparently it's possible even with a government-backed loan. And apparently it's possible in this credit market where every underwriter wants every tiny last piece of information, including what you ate for dinner each day during the past year.