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$10,000 Medical Collection: Can I Qualify For A Mortgage?

Dahna Chandler
The Mortgage Reports contributor

Will Medical Collections Kill Your Mortgage Approval?

Medical collections are different from other accounts, because no one runs up medical debt on purpose. But can you qualify for a mortgage with a (huge) medical collection?

Verify your new rate (Aug 9th, 2020)

Unpaid Collections Damage Credit

When you don’t pay them, medical collections reduce your credit score and your ability to obtain new credit. The newer it is, the more negative impact a collection has on these three important digits.

Most home loan lenders require a minimum FICO score for you to qualify for a mortgage, and medical collections could prevent you from achieving loan approval. However, recent changes have made medical debt less harmful to your credit score.

What Credit Score Do You Need For A Mortgage?

Medical Collections Treated Differently

The Consumer Protection Financial Bureau (CFPB) found that millions of consumers only have medical collection debt on their credit report. Most of those consumers are in their prime home buying years, between age 24-46.

Because those consumers are less likely to default on future credit accounts than those with non-medical collections, FICO credit scoring, Fannie Mae, Freddie Mac and FHA now treat medical debt differently, which should increase the number of mortgage approvals for these consumers.

The Impact Of FICO 9

In 2014, FICO released FICO 9, a new credit scoring model that disregards all paid collection accounts and gives less weight to unpaid medical collections. For consumers with no major damage other than medical debt, FICO 9 provided an immediate median 25 point score increase.

If your lender uses FICO 9 or the VantageScore 3 scoring model, paid or settled collection accounts won’t affect your credit score. FICO Score 8 and 9 also don’t consider collection accounts if your original balance was under $100.

However, if a lender isn’t using the latest credit scoring model, a paid or unpaid medical collection can decrease your ability to qualify for a mortgage.

If that’s a concern for you, ask before you authorize a credit report. And if you think there might be any skeletons in your financial closet, check your report for free at annualcreditreport.com, so you’ll know if FICO 9 will make a difference for you.

Do You Have To Pay off Your Collection?

Fannie Mae’s latest version of Desktop Underwriter (DU) ignores medical collections, and does not require you to pay them off to get your mortgage. In fact, Fannie’s guidelines often don’t require you to pay off any collection before getting a mortgage.

If a conventional mortgage borrower is qualifying for a one unit owner occupant principal residential property, the conventional mortgage borrower is not required to pay off any unpaid outstanding collection accounts and/or non-mortgage charge off accounts regardless of the collection account balance.

Freddie Mac’s rules are similar to Fannie Mae’s, but what about FHA lenders?

FHA does not consider medical debt in its underwriting. It says, “Medical Collections are not required to be paid and satisfied.”

The Bad News: Lender Overlays

However, just because Fannie, Freddie and FHA rules instruct lenders to take medical collections out of consideration when they underwrite your mortgage doesn’t mean your lender has to do so.

Lenders may not apply lower standards when underwriting than the guarantor specifies, but they can impose higher standards. And many do. These are called lender overlays.

The issue is that even if consumers with medical collections are less risky to lend to than those with other collections, they still represent more danger than those with no collections, and lenders know this.

Many mortgage lenders require you to pay collections in full before they will fund your loan. Some even require all collections to have been paid for a period of time, such as one year.

Get That Mortgage

Before you begin shopping for a mortgage, pull your free annual credit reports and see what is there. If you see medical collections, make sure you owe the medical debt.

You might be one of many consumers with medical collection debt on their credit reports who don’t owe the debt. Dispute it once you learn you don’t owe the debt, especially if your insurer is responsible for paying those medical bills.

But, whatever you do, don’t reactivate the debt or restart the clock on the debt. That’s easy to do when you make promises to pay or make any payments when you talk to collectors, who’ll pressure you to do both.

No matter what they say, most of the time, it’s not automatically removed from your credit when you pay. So, if you don’t have to repay the debt to get a mortgage, don’t attempt to repay the debt. That may cause more harm than good.

Most importantly, shop lenders for both rates and lending policies. Before you have your credit report pulled by any lender, ask them about overlays, and find out if they use the latest FICO scoring model, FICO 9.

What Are Today’s Mortgage Rates?

Current mortgage rates are very attractive, even if you have to pay a little more because of your collections. It pays to shop with several competing home loan providers, so, find a lender using the right mortgage underwriting tools for you, as well as the best rates and terms.

Verify your new rate (Aug 9th, 2020)