Can Medical Bills Stop You From Buying a House?

Medical bills are a common concern for individuals undertaking major financial commitments like buying a home. Unexpected healthcare costs can influence a person’s financial standing and ability to secure a mortgage. Understanding how medical debt impacts credit and financial ratios is important for anyone navigating the home-buying process.

How Medical Debt Appears on Credit Reports

Original medical bills typically do not appear on a consumer’s credit report unless they become significantly overdue and are subsequently sold to a collection agency. Healthcare providers usually do not report directly to the major credit bureaus, distinguishing medical debt from other types of consumer debt like credit cards or auto loans.

As of recent changes, there is a 365-day (one-year) waiting period from the date of delinquency before an unpaid medical collection account can appear on your credit history. This extended grace period allows consumers time to resolve billing errors, pay the bill, or work with their insurance company before the debt impacts their credit report. Furthermore, medical collection accounts with an initial reported balance under $500 are no longer included on credit reports. Paid medical collections are also entirely removed from credit reports.

Impact on Credit Score

Reported medical debt can still influence a credit score, though recent changes have mitigated some of this impact. Unpaid medical collection accounts over $500, once past the one-year grace period, can negatively affect a credit score and may remain on a credit report for up to seven years from the original delinquency date. However, newer credit scoring models treat medical collections differently than other types of debt.

FICO Score 9, for instance, disregards all paid collection accounts and assigns less weight to unpaid medical collections compared to unpaid non-medical collections. Similarly, VantageScore 3.0 and 4.0 models entirely exclude medical collection data from their calculations. This differentiated treatment can result in a smaller impact on scores for those with medical debt, with some consumers potentially seeing score increases. Lenders may use various scoring models, so the exact impact on a mortgage application can depend on the model utilized.

Impact on Debt-to-Income Ratio

The debt-to-income (DTI) ratio is a significant metric mortgage lenders use to assess a borrower’s ability to manage monthly payments and repay a loan. This ratio compares your total monthly debt payments to your gross monthly income, expressed as a percentage. Lenders generally prefer a DTI ratio of 43% or lower for conventional mortgages, as a higher ratio can signal potential financial strain.

While medical bills not financed through loans typically do not factor into the ‘debt’ portion of the DTI calculation, any active payment plans for medical debt will be considered. If a consumer has established a recurring monthly payment plan for medical debt, that payment will contribute to their total monthly debt obligations, thereby increasing their DTI ratio. A higher DTI can make it more challenging to qualify for a mortgage or to secure favorable interest rates, as it suggests less disposable income available for housing expenses.

Addressing Medical Debt for a Mortgage Application

Individuals planning to apply for a mortgage should proactively address any existing medical debt to minimize its potential impact. A first step involves obtaining copies of credit reports from all three major bureaus—Experian, Equifax, and TransUnion—to review them for accuracy. Disputing any incorrect or outdated medical collection entries is important, and consumers can file disputes directly with each credit bureau, providing supporting documentation if available.

If a medical bill has gone to collections, paying it off can lead to its removal from credit reports, especially for paid medical collections. Negotiating with collection agencies for a reduced settlement or establishing a manageable payment plan can also be beneficial. Some medical providers or hospitals may offer financial assistance programs or allow for payment plans to prevent bills from going to collections. While federal housing authorities like FHA, VA, and USDA now disregard medical collections in their assessments, non-government mortgage programs might still consider them, making proactive resolution a prudent strategy.