How Medical Debt Might Impact How You Qualify for a Home Loan  

06.6.2022 | Category: Homebuying

Medical expenses. It’s something all Americans are familiar with. Medical debt has become one of the most common reasons homeowners are faced with challenges when seeking approval on a home loan and has been an issue even prior to the COVID-19 pandemic. 

White House Takes Action to Help Would-Be Homeowners with Medical Debt

In light of this issue, the Biden Administration recently announced reforms to protect consumers and lessen the burden of medical debt on American families. 

One of the key decisions rolled out includes reducing the role medical debt plays in determining whether Americans can access credit – which will have the potential to offer new opportunities for people with medical debt to buy a home. The Biden Administration recommends in cases where it's legal and practical, medical debt is no longer considered in the loan approval process.

In addition, Americans with medical debt can apply for an FHA-backed mortgage without fear that medical debt will keep them from being able to buy a home. FHA – which insured more than 12 % of new home purchases in the United States — has eliminated medical debt from consideration when evaluating a borrower’s creditworthiness. 

The White House also announced the Consumer Financial Protection Bureau (CFPB) will investigate credit reporting companies and debt collectors that violate patients’ and families’ rights, and hold violators accountable. According to the White House, the CFPB has already issued a bulletin to prevent unlawful medical debt collection and reporting. 

Key Changes to How Medical Debt is Reported by the Three Credit Bureaus

These federal policy guidelines come on the heels of the three major credit bureaus, Experian, Equifax, and TransUnion, announcing a significant change to how they would report medical debt collections and how the accounts would impact credit scores earlier this year.

Starting in March:

• Paid medical collection debt will no longer be included in consumer credit reports
• The time period before an unpaid medical collection debt will appear on a consumer's report will be increased from six months to one year 
• Removal of medical debts of less than $500 from consumer credit reports.

The bureaus estimate the new change will result in nearly 70% of the medical debt on Americans’ credit reports. In addition, Equifax, TransUnion and Experian announced that beginning in July they will stop including medical debts that were in collections before being paid.

How These Changes to How Medical Debt is Reported May Help You Buy a Home 

These actions have significant impacts on consumer credit scores - a key factor in being approved for a mortgage loan. Another factor, debt-to-income ratio, also plays a key role. 

As part of the mortgage loan approval process, your credit score and history are checked to ensure you’re not taking on more debt than you can realistically handle. In most cases, you don’t need top-tier credit to qualify as long as your debt-to-income is low. 

This is where medical debt and the elimination of medical debt from a credit report is very important. If a perspective home buyer is in $50,000 of medical debt, having that be eliminated from a credit report greatly improves a borrower's debt to income ratio as well as likely their credit score. 

The change also brings significant racial and socio-economic equity to the lending process. According to the Washington Post, “Low income and minority groups disproportionately bear the burden of medical debt.” This new measure will help elevate the credit scores of populations that have systemically carried higher medical debt, and as a result, higher than average debt-to-income ratios, impacting their ability to be approved for a conventional mortgage loan. 

It’s important to know how medical debt can impact your creditworthiness and your potential to be approved for a home mortgage loan. If these new changes have improved your financial outlook, now might be the right time to consider a home loan. 

Click here to visit Mutual of Omaha Mortgage's full list of purchase loan offerings and get started today and learn if home ownership is within reach today.

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• The three national credit bureaus have announced that they are making significant changes to the way medical debt collection data is reported on consumer credit reports. Specifically, the bureaus have agreed to three major changes, which are anticipated to impact 70% of medical collections.
• Medical debt is not included as part of your credit report if it remains with your original service provider, but once it goes to collections it likely affects your credit score. These debts can linger on your credit report for up to seven years, although the new rule will now remove them if they are paid off.
  period before an unpaid medical collection debt will appear on a consumer's report will be increased from six months to one year 
• Did you know there have been significant changes to how medical debt is reported on credit reports?

These changes are intended to help would-be homeowners lower their debt to income ratio and improve their credit scores, helping to overcome common challenges to home ownership. 

Learn more on the blog!