âBeginning in early 2023, all medical debt with an original owed balance below $500 will be removed from credit reports. If your outstanding bills meet this requirement, it could be worth waiting until the change occurs to begin shopping for a home.
Medical costs have long been a burden for Americans, with more than 19% of households reporting that they are unable to pay their medical bills right away. As a result, many adults find themselves stressed and dealing with the after-effects of these debts, which they likely didnât even choose to incur.Â
As of July 1, 2022 medical debt will begin to impact consumersâ credit scores in fewer ways. While unpaid medical bills still have consequences, its still possible to qualify for a loan and buy a house when you shoulder this type of debt, if all of your other financials are sound.
Buying a house is an exciting milestone, but medical debt can throw a wrench into the homebuying process. With medical bills now the largest source of debt in collections on consumer credit reports, many homebuyers are navigating how past-due medical bills impact mortgage eligibility. So how exactly does medical debt affect your ability to buy a house? Here’s what potential homeowners need to know.
How Medical Debt Impacts Your Credit Score
Your credit score plays a major role in mortgage approval and interest rates. Lenders view your credit report to evaluate your creditworthiness. Any outstanding medical collections can lower your credit score, making it harder to qualify for a mortgage.
According to a CFPB report, 58% of accounts currently in collections are related to medical expenses. Even a single unpaid medical bill that gets sent to collections can drop your credit score by up to 100 points.
New Changes Limiting Medical Debt Impact
However, recent changes by credit bureaus and the federal government have limited how severely medical debt dings credit reports.
In July 2022, Equifax, Experian and TransUnion stopped including paid medical collections on credit reports Unpaid medical bills won’t appear until 12 months of nonpayment, up from 6 months Additionally, VantageScore and FICO have reduced how heavily medical debt factors into credit scoring models.
The CFPB also finalized a rule banning credit reports from containing medical debt information. This prevents lenders from considering medical bills when making lending decisions.
Strategies for Buying a House with Medical Debt
If you have outstanding medical bills and want to buy a house soon, here are some tips
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Pay off collections accounts. Settling medical collections, even if only paying $1, can help improve your credit score.
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Dispute errors. If you spot any inaccuracies on your credit report, contest them with the credit bureaus. Mistakes are common with medical bills.
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Leverage FHA loans. FHA mortgages disregard collections under $2,000, which could make you eligible despite medical debt.
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Explain circumstances to lenders. Provide context on the source of medical debt and your current financial health.
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Consider mortgage lenders who allow exceptions. Some lenders may grant leniency for medical debt compared to other types.
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Build savings for a larger down payment. The higher your down payment, the more comfortable lenders feel approving your loan application.
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Work to improve other credit factors. Maintaining on-time payments and lowering credit utilization can help offset medical debt.
The Outlook for Medical Debt and Homebuying
In the past, medical debt severely hindered mortgage eligibility, especially for first-time homebuyers. But policy changes limiting its credit reporting impact have created a more optimistic outlook.
Prospective homeowners with medical debt still face challenges compared to those without collections. However, proactive steps to improve your credit profile can better position you to achieve homeownership goals.
Being strategic and patient with the homebuying process makes success more likely, despite past medical expenses. With proper planning and context, medical debt does not have to prevent you from buying your dream home.
What happens when medical bills go to collections
Unpaid medical bills donât affect your credit right away. In fact, itâs not until these accounts are sent to a collections agency that they will even appear on your credit report.Â
Collections are the result of delinquent accounts that go unresolved for a period of time. This usually happens between 90 and 120 days if a mutual payment agreement is not established, though this really varies by provider.Â
Once the account goes into collections, you may find it quickly reported to the credit bureaus. The delinquent account will show up as an unpaid debt on your credit report(s) and as such, can have a significant impact on your credit score.Â
Tips on buying a house if you have medical bills
Nearly 18% of credit reports had at least one medical bill in collections in 2020, according to the Consumer Financial Protection Bureau (CFPB). If you are one of those individuals with outstanding medical bills and plan to buy a home in the near future, here are a few ways you can plan ahead.
Do medical bills affect your credit when buying a house
FAQ
Can medical debt affect a mortgage?
The CFPB’s research reveals that a medical bill on a person’s credit report is a poor predictor of whether they will repay a loan, and contributes to thousands of denied applications on mortgages that consumers would be able to repay.
Does medical debt count against you when buying a house?
While medical collections are not technically considered in directly underwriting a mortgage, they affect a person’s credit score. The credit score is evaluated in a mortgage application. According to Experian, a medical collection can drop a person’s credit score up to 100 points.
Does medical debt count in the debt to income ratio?
Not all monthly payments count
Other monthly payments are not included in your DTI ratio. These include medical debt, utility bills, cable bills, monthly cellphone payments and monthly internet bills. You won’t have to worry about these debts, then, when aiming for a lower DTI ratio.
Do banks care about medical debt?
Because of medical debt’s limited predictive value in evaluating future credit risk, the credit and lending industries have reduced their reliance on it. In 2023, the three major credit agencies removed medical debts under $500 from consumer credit reports.