Depends on the debt. If they can be paid off prior to closing, this is not true. If they are a foreclosure or bankruptcy, the waiting period is 3 years assuming extenuating circumstances (Life Happened, not just "I didn't want to pay my mortgage"). Refer to Fannie Mae, Freddie Mac, or FHA underwriting guidelines for specifics (lots of complexity here around non-QM originations, overlays, portfolio loans, etc so the answer will always be "it depends"). FHA is 3.5-10% downpayment required, depending on credit score.
(sources: have been foreclosed on after buying at the peak prior to the Global Financial Crisis, had judgements erroneously on my LexisNexis risk report for over a decade, have family in the mortgage banking industry [specifically mortgage underwriting], did a brief stint as a contract mortgage underwriter in my early 20s, and am very familiar with navigating creditor law but am not an attorney nor your attorney)
That's true in theory, though in practice any house you would actually want to live in is going may have a bunch of buyers competing on it and having an FHA loan (or VA, sadly, or USDA) ensures your bid is in last place. However, there are some conventional lenders that will do 3% if you get approved for PMI.
And yeah, some creditors will do pay-for-delete in which case you may be fine. If you have more than 1 that won't though you may have a hard time, especially if it's not due to medical or something easily justifiable.
> And yeah, some creditors will do pay-for-delete in which case you may be fine.
Pay for delete is paying to have it removed from your credit file by the data provider (either the creditor or their debt collector). This is distinctly different. You pay the debt and provide confirmation the debt was paid. Whether it is still on your credit file is immaterial to close. It's paid? You close.
(the guidelines are what makes the originated mortgages conforming, and able to be bundled for securitization and sold into the bond market; to understand mortgage guidelines is to be able to hack mortgage financing)
> Whether it is still on your credit is immaterial to close.
Not if your score is tanked from having collections on it. Again, there are guidelines, but then there’s the real world. In the real world FHA loans means any desirable house you can’t buy and if you don’t have a decent score you’re not getting PMI.
(sources: have been foreclosed on after buying at the peak prior to the Global Financial Crisis, had judgements erroneously on my LexisNexis risk report for over a decade, have family in the mortgage banking industry [specifically mortgage underwriting], did a brief stint as a contract mortgage underwriter in my early 20s, and am very familiar with navigating creditor law but am not an attorney nor your attorney)