Can medical bills doom a home loan approval?
There have been some changes as to how lenders look at medical bills or collections.
In recent years, credit reporting agencies and mortgage industry guidelines have recognized that medical debt is different from other forms of consumer debt. An unexpected illness or emergency room visit is rarely the result of overspending, and new reporting standards reflect that reality.
Some important changes include:
- Unpaid medical collections under $500 are no longer included on most major credit reports.
- Paid medical collections are removed entirely from credit reports.
- FHA and VA loan programs generally do not consider medical collections during underwriting.
- Fifteen states have adopted laws limiting how medical debt can be reported, providing additional consumer protections.
- Some lenders still rely on FICO 8 credit scores, which may continue to factor medical collections into the score.
Because different lenders use different credit models, the effect of medical debt varies from one mortgage application to another.
If you are in the market for a home loan and you discover a collection on your account reach out to a loan officer to determine how you should handle it. Getting started on a credit review well ahead of the time you intend to purchase a home is ideal.
My experience in the lending world is that often people are unaware of a medical collection in particular. Lenders use automated underwriting and follow the recommendations of the findings. Quite often collections are ignored and do not doom a home loan approval.
Stay on top of your credit by utilizing the free resource www.annualcreditreport.com You are entitled to a free copy of your credit from TransUnion, Equifax and Experian once a year. I love this free resource!
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