Mortgage And Medical Bills: What's The Connection?

Medical debt has become a common reason for homeowners to face challenges when seeking approval for a home loan. It is important to note that medical debt can impact your credit score and, consequently, your ability to obtain a mortgage. While medical collections are treated more leniently than non-medical collections during the mortgage underwriting process, they can still negatively affect your chances of securing a loan. Unpaid medical bills can increase your debt-to-income ratio and may appear on your consumer report, reducing your credit score. However, recent changes have been made to reduce the negative impact of medical debt on credit scores, and there are steps you can take to manage unexpected medical expenses.

The impact of medical debt on credit scores

However, recent changes have been made to address this issue and reduce the negative impact of medical debt on credit scores. The Consumer Financial Protection Bureau (CFPB) has finalized a rule that bans the inclusion of medical bills on credit reports used by lenders and prohibits them from considering medical information in their lending decisions. This rule is expected to boost the credit scores of millions of individuals and increase their chances of obtaining affordable mortgages. Additionally, the CFPB's research revealed that medical debt was a poor predictor of an individual's ability to repay a loan, leading to thousands of denied mortgage applications from people who were actually capable of repayment.

Despite these changes, it is important to note that the impact of medical debt on credit scores can vary depending on the scoring model used. For example, FICO 8 and 9 do not consider collection accounts if the original balance was under $100. On the other hand, older credit scoring models may still view unpaid medical collections as a negative factor, reducing an individual's ability to qualify for a mortgage. Therefore, it is advisable to check with the lender about the scoring model they use before authorizing a credit report.

Furthermore, while medical debt itself may no longer be included in credit reports, related financial aspects might still be considered. For instance, if an individual takes out a personal loan or uses a credit card to pay for medical expenses and falls behind on those payments, this could still impact their credit score. Similarly, if a person has a written payment plan for more than ten monthly installments, their unpaid medical bills can affect their debt-to-income ratio, which lenders consider when evaluating mortgage applications.

In conclusion, while the impact of medical debt on credit scores has been mitigated to a large extent, it is still a factor that individuals should be mindful of when seeking to obtain a mortgage. The specific circumstances, such as the scoring model used and the presence of related financial obligations, can influence the overall impact on an individual's creditworthiness. Therefore, staying informed about these factors and proactively managing medical debt is essential for maintaining a strong financial position when applying for a mortgage.

Lender requirements and eligibility

Firstly, it is important to note that medical debt can impact your credit score, which is a key factor in mortgage approval. As of 2023, all medical debt with an original balance below $500 will be excluded from credit reports, which can improve your credit score. However, larger medical debts that are sent to collections agencies can lower your score. A lower credit score may lead to higher mortgage interest rates, impacting your ability to secure a loan.

Secondly, medical debt can influence your debt-to-income (DTI) ratio, which lenders use to determine your affordability for monthly payments. A higher DTI ratio may reduce your chances of obtaining a mortgage. The front-end DTI considers primary housing expenses, while the back-end DTI includes additional borrowing commitments. Unpaid medical bills can significantly affect the front-end DTI, especially if they result in higher interest rates.

Fannie Mae, Freddie Mac, and the Federal Housing Administration (FHA) have implemented rules that exclude medical debt from their underwriting criteria. The FHA, for instance, has eliminated medical debt from evaluating a borrower's creditworthiness. However, individual lenders may impose stricter standards, known as lender overlays, which can affect eligibility.

To improve your chances of qualifying for a mortgage, it is advisable to review your credit reports and address any medical debt. Disputing inaccurate debt and ensuring timely payments can enhance your creditworthiness. Additionally, seeking assistance from a mortgage broker or exploring special credit programs, such as those for disabled veterans, can provide alternative pathways to obtaining a mortgage while managing medical debt.

FHA-backed mortgages

While medical debt is one of the most common reasons homeowners face challenges when seeking approval for a home loan, FHA-backed mortgages do not consider medical debt in their underwriting. The Federal Housing Administration (FHA) has eliminated medical debt from consideration when evaluating a borrower's creditworthiness. This means that FHA-backed lenders do not require applicants to pay and satisfy medical collections.

However, this does not mean that all lenders offering FHA-backed mortgages will ignore medical debt. Lenders can impose higher standards than the guarantor specifies, and many do. These are called lender overlays.

It is important to note that while FHA-backed mortgages do not consider medical debt, other factors related to medical debt may still impact your ability to qualify for a mortgage. For example, if you have a written payment plan for more than ten monthly installments, unpaid medical bills can increase your debt-to-income ratio, which lenders use to determine how much home you can afford. Additionally, medical debt can appear on your consumer report and negatively impact your credit score, depending on the scoring model used.

To mitigate the potential impact of medical debt on your ability to qualify for an FHA-backed mortgage, it is recommended to pull your free annual credit reports before shopping for a mortgage. If you find any medical collections, verify that you owe the debt, as it is not uncommon for consumers to have medical collection debt on their credit reports that they do not actually owe. If you do not owe the debt, be sure to dispute it, especially if your insurer is responsible for paying those medical bills. However, do not reactivate the debt or restart the clock by making promises to pay or making any payments, as this can cause more harm than good.

Credit report discrepancies

If you identify an error on your credit report, you should contact the credit bureaus that produced the report with the error. It is recommended that you provide your contact information and explain in writing what the error is and why it is incorrect. Supporting documentation, such as emails verifying the status of the account, should also be included. The credit bureau generally has 30 days to investigate and verify the information with the furnisher (the company that provided the information to the credit bureau). If the disputed information is found to be inaccurate, the furnisher must notify all credit bureaus to which it sent the incorrect information so that they can correct their records.

Identity-related errors, such as a misspelled name, wrong phone number, or address, or incorrectly reported accounts, such as a closed account reported as open, are common discrepancies found on credit reports. Errors may also occur when loan or credit card payments are applied to the wrong account, or when accounts are reported more than once, making it appear that there are more open lines of credit or higher debt than there actually are. Additionally, if you are divorced, ensure that your former spouse's debts are not reflected on your report.

It is also important to note that, as of July 1, 2022, medical debt will impact consumers' credit scores in fewer ways. All medical debt with an original owed balance below $500 will be removed from credit reports. This means that unpaid medical bills alone may not preclude individuals from obtaining a mortgage, especially if they meet other eligibility requirements, such as a strong payment history and a healthy down payment. However, unpaid medical bills can still impact your credit score and ability to obtain a mortgage, especially if they appear on your consumer report and are considered by the lender.

Strategies to pay off medical debt

While having a mortgage and incurring medical debt is a challenging situation, there are strategies you can employ to address and alleviate your financial burden. Here are some detailed and direct approaches to help you manage and pay off your medical debt:

Understand the Impact of Medical Debt on Your Mortgage

Before devising a strategy, it's crucial to recognize how medical debt can influence your mortgage. Unpaid medical bills can have both direct and indirect effects. Firstly, they can increase your debt-to-income ratio, which lenders use to determine the amount you can borrow for your mortgage. Secondly, medical debt can appear on your consumer report and negatively impact your credit score, making it harder to obtain credit or secure favorable loan terms. However, it's important to note that recent changes and lender policies have reduced the adverse effects of medical debt on your creditworthiness.

Review Your Credit Reports and Dispute Errors

Before actively seeking to pay off your medical debt, it's essential to review your credit reports. Obtain your free annual credit reports and scrutinize them for any medical collection accounts. Ensure that you actually owe the medical debt, as errors or discrepancies can occur. If you find any inaccuracies, dispute them promptly. Contact your insurer if they are responsible for covering certain medical expenses. Be cautious when dealing with debt collectors to avoid accidentally reactivating or restarting the debt clock.

Negotiate and Seek Repayment Options

Medical debt often provides more room for negotiation compared to other forms of debt. Contact your medical providers, including physicians, dentists, and hospitals, to discuss repayment options. Many of them are willing to work out a no-interest or low-interest payment plan that suits your financial situation. Break down the total bill into multiple equal payments over several months until it's fully covered. Ask about any associated fees or charges to make an informed decision. Additionally, explore the possibility of applying for medical credit cards, which often offer an interest-free period. However, be mindful of deferred interest rates that could significantly increase your debt if not paid off within the promotional period.

Utilize Government Programs and Charity Care

Take advantage of government programs that offer free or low-cost medical care, such as the National Breast and Cervical Cancer Early Detection Program (NBCCEDP) and the Ryan White HIV/AIDS Program. These programs are typically based on income, age, insurance coverage, and specific health issues. Additionally, consider applying for a debt management plan, where a credit counselor will develop a personalized payment schedule to help you manage your debt more effectively. Charity care programs are another option for those who still need assistance after insurance or Medicaid payments. These programs can assist with remaining costs and are often available through the doctor or hospital providing treatment.

Explore Donor-Powered Medical Debt Relief

Recognize that there are organizations dedicated to alleviating the burden of medical debt through donor-powered initiatives. These charities, such as Undue, work to erase significant amounts of medical debt for individuals and families facing financial challenges. Every donation made to such organizations can go a long way toward relieving medical debt for those in need.

Improve Your Creditworthiness

Focus on improving your overall creditworthiness to enhance your chances of obtaining a mortgage or securing better loan terms. Maintain a strong payment history, a healthy down payment, and stable income. Lenders prioritize these factors when evaluating your eligibility, so ensure you meet their requirements beyond just addressing your medical debt.

Remember, the specific regulations and policies regarding medical debt and mortgages can vary over time and across different locations. It's always advisable to consult with financial advisors or experts who can provide personalized advice based on your unique circumstances.

Frequently asked questions