As a mortgage lender, I am required to examine my client’s entire financial situation, including any debt. Often I see medical collection debt among the items that can hold a person back from obtaining a loan – or a loan with great terms.
For people working hard to pay down medical debt, there’s great news from the world of consumer credit reporting.
Since July 1, 2022, medical collection debt that is paid is no longer included on credit reports.
Moreover, the time period before unpaid medical collection debt would appear on a credit report has increased from six months to one year. The extension gives potential homebuyers more time to work with insurance and/or healthcare providers to address their debt before it’s reported on their credit file.
The six-month grace period allows borrowers a greater opportunity to negotiate the amount owed or work on a payment plan with the provider. If a medical collection is wrongly reported, you should always contact the provider and collection agency, and you can also file a dispute with the credit bureaus.
If you still have unpaid medical debt after the initial grace period, those collections reporting on your credit report may affect your mortgage qualification. With FHA loans, the mortgage lender must determine if any collection accounts (including medical) were opened due to the borrower’s disregard for financial obligations, inability to manage debt or extenuating circumstances.
The mortgage lender must document reasons for approving a mortgage when the borrower has any collection accounts. The borrower must provide a letter of explanation, which is supported by relevant documentation. If the medical collection is in dispute status, the lender may be able to exclude that during analysis of credit history, although documentation may still be needed.
In the first half of 2023, Equifax, Experian and TransUnion will also no longer include medical collection debt under $500 on credit reports.
This is a big deal for those who are working on improving their credit scores. Here are additional tips to increase your score.
● Pay your bills on time. Payment history has the biggest impact on your credit scores. Lenders and creditors want to see that you make payments on time. When you have late payments, even one or two, it can drastically impact your score.
● Keep balances low. Debt isn’t a bad thing, but the key is how you manage it. If you max out on all your loans and credit cards, it will negatively impact your scores. If you keep your balance at less than your credit limit, that will help your scores because it shows you are responsible and can manage expenses.
● Apply for and open new credit accounts only as needed. Only open credit accounts you absolutely must have. If you need to open a new account, make sure the terms and conditions are acceptable, keep a low balance and pay your bill on time.
● Pay off debt rather than moving it around. Do not move debt from one account to the next. That won’t solve anything. You need to work to pay down the balances in a consistent way.
● Be patient! Raising your credit score is all about consistent long-term payments and responsible activity. That kind of behavior demonstrates you can handle a large credit account like a mortgage.
As we look to 2023, be optimistic about buying a home and ask your mortgage lender about important credit reporting changes you need to know.
Shikma Rubin (NMLS ID #1114873) is a loan officer at Tidewater Home Funding in Chesapeake. Have mortgage questions? Reach her at firstname.lastname@example.org or 757-490-4726.