This is really over simplified, but I just wanted to get you thinking about options. You should talk to a mortgage lender or two and have them look in more detail at your situation.
What type of debt is this? A collection account or judgment? If a judgement, you will be required to pay that off. If it is a collection, that is a "maybe"...depending on the amount, how old it is and good ole underwriter discretion. If it is an old collection, paying it off now may resurrect the dead and actually bring your scores even lower.
As equally (if not more) important, is looking at what is on your credit report that is currently HELPING your scores. Do you have any open tradelines that are actively reporting good info each month?
There are so many things that can hurt or help your scores. I would recommend talking to an experienced loan officer and really looking at the entire credit profile.
If you are worried about it even before a lender brings it up, my advice is to take care of that first, then buy a home. Good luck,
NMLS # 6395
Financing Kentucky One Home at a Time
In order to be able to sell a mortgage off in the secondary market, lenders must ensure lendees meet specific guidelines. If a lendee happens to be outside of those guidelines, some banks might offer an 'in house' loan that they keep. Typically these loans come with higher interest rates and shorter terms. Another option buyers have besides conventional financing is purchase money mortgages, where the seller finances the loan and the buyer gets a deed, or contract for deed where the seller finances the loan but holds title until the contract is satisfied. Your best bet at this point would be to talk with a lender to see what your conventional options are.
Please let me know if I can help you,