Do Mortgage Lenders Look At Medical Collections

Do mortgage lenders look at medical collections? Yes, they do, but the impact varies. Medical collections are often treated differently than other types of debt. Most lenders will consider them when evaluating your creditworthiness, especially if they’re recent or significant (like over $500). However, many lenders may overlook paid medical debts, especially if they’re not actively affecting your credit score. Generally, if you have medical collections that total less than 30% of your total debts, you might still qualify for a mortgage, but it could affect your interest rates.

Understanding Medical Collections

Medical collections can be a tricky area when it comes to your credit report and mortgage applications. Unlike credit card debt or personal loans, medical debt is often unexpected and can result from unforeseen circumstances, like an emergency surgery or a long hospital stay. So, how do lenders view this type of debt?

What Are Medical Collections?

Medical collections occur when you fail to pay your medical bills, and these debts are sent to collections. For example, if Sarah, a 35-year-old teacher in Denver, had a $1,200 hospital bill that she couldn’t pay, the hospital might send it to collections after 90 days. This collection account could show up on her credit report and potentially impact her mortgage application.

How Lenders Assess Medical Collections

When lenders review your credit report, they’ll look at your overall debt-to-income ratio (DTI), which is the percentage of your monthly income that goes toward paying debts. Medical collections may factor into this calculation, but they often have a lesser impact compared to other collections or debts. If Sarah’s total monthly debts (including the medical collection) are less than 43% of her gross monthly income, she may still qualify for a mortgage.

The Impact of Medical Collections on Your Credit Score

Credit scores can range from 300 to 850, and medical collections can negatively affect your score. Here’s how it works:

FICO Score Ranges

• Excellent: 740-850
• Good: 670-739
• Fair: 580-669
• Poor: 300-579

A medical collection can drop your credit score by 50 to 100 points, depending on other factors. For instance, if Sarah had a 720 score before the collection, it might drop to around 670 or lower after the collection appears. However, the good news is that recent changes to credit scoring models, like FICO 9 and VantageScore 4.0, don’t weigh medical collections as heavily as they did in the past.

Timeframe Matters

The longer a medical collection stays on your credit report, the less impact it usually has. Most collections can remain on your report for up to seven years. However, if Sarah paid her collection within six months, her score might recover faster than if it lingered unpaid for years. Lenders may also be more lenient if the collection is older.

Types of Mortgages and Their Stance on Medical Collections

Not all mortgage lenders are created equal, and their policies on medical collections can vary. Let’s break down some common types of mortgages.

Conventional Loans

Conventional loans are typically more stringent. They usually require a minimum credit score of 620. If Sarah has a medical collection under $500 and a solid income, she might still qualify. However, larger collections could lead to higher interest rates or even denial.

FHA Loans

FHA loans are more forgiving when it comes to medical collections. They allow for lower credit scores (down to 580 with a 3.5% down payment). If Sarah’s collection is medical and she can prove she’s made payments or has a solid income, she might still secure an FHA loan.

VA Loans

VA loans are designed for veterans and often don’t have strict credit requirements. Medical collections generally have less impact here. If Sarah is a veteran with a medical collection but a good income, she might find VA loans to be a viable option.

Strategies for Managing Medical Collections

If you’re dealing with medical collections, there are strategies you can employ to minimize the impact on your mortgage application.

Negotiate with Medical Providers

Sometimes, you can negotiate the amount owed. If Sarah calls the hospital and explains her situation, they may agree to reduce her debt or set up a payment plan.

Pay Off Collections

Paying off collections can help improve your credit score. While it may not remove the collection from your report, it shows lenders that you’re taking responsibility. If Sarah pays off her $1,200 collection, it might not disappear, but it will show as settled, which is better than unresolved debt.

Keep Documentation

If you’re applying for a mortgage, having documentation of payments or negotiations can help. If Sarah keeps records of her communication with the hospital and proof of payment, it could be beneficial when explaining her situation to lenders.

Real-World Scenarios

Let’s look at a couple of real-world scenarios to illustrate how medical collections can impact mortgage applications.

Sarah’s Story

Sarah, a 35-year-old teacher in Denver, had a medical collection of $1,200 from a hospital visit. She was applying for a conventional loan with a credit score of 720. When the lender found the collection, they initially hesitated. However, Sarah explained that she had set up a payment plan and was actively paying it off. The lender took this into account and offered her a mortgage with a slightly higher interest rate but still approved her application.

Mike’s Experience

Mike, a 40-year-old software engineer in Austin, had two medical collections totaling $2,500. His credit score was 650, and he was aiming for an FHA loan. When he applied, the lender noted the collections but also saw that he had a steady job and wasn’t behind on other debts. Mike provided documentation showing he was making monthly payments toward the collections. The lender approved him for the FHA loan, allowing him to secure a home despite his medical debts.

Frequently Asked Questions

1. Do all lenders view medical collections the same way?

No, different lenders have varying policies regarding medical collections. Some may overlook them, especially if they’re paid, while others might see them as a red flag, especially for larger amounts.

2. Will paying off a medical collection improve my credit score?

Yes, paying off a medical collection can improve your credit score over time. While it may not remove the collection from your report, it shows lenders that you’re taking responsibility for your debts.

3. How long do medical collections stay on my credit report?

Medical collections can stay on your credit report for up to seven years. However, their impact on your credit score diminishes over time, especially if they’re paid off.

4. Can I qualify for a mortgage with medical collections?

Yes, you can still qualify for a mortgage with medical collections. The key factors will be the total amount of your collections, your overall credit score, and your debt-to-income ratio.

5. What should I do if I have medical collections and want to apply for a mortgage?

If you have medical collections, start by checking your credit report. Pay off any unpaid collections, keep documentation of your payments, and consider speaking to lenders that specialize in loans for individuals with medical debt.

Conclusion

Navigating the mortgage process with medical collections can be challenging, but it’s not impossible. Understanding how lenders view medical debt and knowing your options can help you secure a mortgage. Take proactive steps—like negotiating your debts, paying them off, and gathering documentation—to improve your chances. If you’re looking to buy a home, don’t let medical collections hold you back. Start by checking your credit and talking to lenders who understand your situation. You’ve got this!