Do Medical Bills Affect Buying a House?

The prospect of purchasing a home often brings financial considerations to the forefront, and medical bills can be a significant concern for many aspiring homeowners. Understanding how medical debt interacts with credit reporting, credit scores, and mortgage eligibility is important for navigating the home-buying process. Recent changes in credit reporting practices have altered the landscape, making it easier for some individuals with medical debt to pursue their homeownership goals.

How Medical Bills Appear on Credit Reports

Medical bills only appear on consumer credit reports if they become delinquent and are subsequently sent to a collection agency. Healthcare providers usually do not directly report unpaid bills to the three major credit bureaus: Equifax, Experian, and TransUnion. Instead, they often sell overdue accounts to third-party collection agencies, which may then report the debt.

Major credit bureaus have implemented significant changes to medical debt reporting. Effective July 1, 2022, paid medical collection debt is no longer included on consumer credit reports. The waiting period before unpaid medical collection debt can appear on a credit report was also extended from six months to one year.

After April 2023, medical collections with an initial balance under $500 no longer appear on credit reports. These policy adjustments aim to remove a substantial portion of medical collection debt from credit files, potentially benefiting millions of consumers. However, if unpaid medical debt above this threshold remains in collections, it can stay on a credit report for up to seven years.

Credit Score Impact

Medical debt on a credit report can affect a consumer’s credit score, though its impact has lessened with newer scoring models. Older FICO score versions weighed medical collections more heavily, similar to other types of delinquent debt. However, FICO Score 9, introduced in 2014, treats medical collections differently.

FICO Score 9 disregards all paid collection accounts, including medical ones, and assigns less weight to unpaid medical collections compared to other non-medical debts. This differentiated treatment means unpaid medical collections have a smaller negative impact on a FICO score. Consumers whose only significant credit blemish was a medical collection might see their FICO Score 9 be approximately 25 points higher than with previous versions.

VantageScore models (3.0 and 4.0) no longer use any medical debt collection data in their credit score calculations, regardless of the amount owed or the age of the collection. This change, operational by early 2023, has led to estimated score increases of up to 20 points for some consumers with medical debt in their files. A 20-point increase in a credit score can result in substantial savings on interest payments, potentially thousands of dollars over the life of a 30-year home loan.

Lender Considerations for Medical Debt

Mortgage lenders evaluate a borrower’s financial health through various metrics, including their credit score and debt-to-income (DTI) ratio. The DTI ratio compares a borrower’s total monthly debt payments to their gross monthly income, indicating their ability to manage additional debt. While medical collections might have less impact on credit scores due to recent changes, outstanding medical debt requiring monthly payments can still influence the DTI ratio.

Lenders prefer a DTI ratio of 43% or lower for mortgage approval, though this can vary based on the loan program and individual lender. For certain government-backed loans, medical debt is treated more favorably. Federal Housing Administration (FHA) loans exclude medical collections from DTI ratio calculations. This means even if a borrower has unpaid medical collections, they may not need to pay them off to qualify for an FHA loan, offering a significant advantage.

Conventional loans, supported by Fannie Mae and Freddie Mac, are more lenient regarding medical collections. These loans do not require medical collections to be paid off or factored into DTI ratio calculations. Despite these flexible guidelines for medical debt, lenders still assess the overall financial picture to ensure a borrower can reasonably manage a mortgage obligation.

Managing Medical Debt for Home Buying

Individuals preparing for homeownership can proactively address medical debt to improve their financial standing. A first step involves obtaining copies of credit reports from Equifax, Experian, and TransUnion to review for accuracy. Consumers should check for any medical debts that have been paid, are less than a year old, or have an initial balance under $500, as these should no longer appear on credit reports.

If inaccuracies are found, disputing them with the credit bureaus is important, providing clear explanations and supporting documentation. Credit bureaus are required to investigate and respond to disputes within 30 days. For medical bills still with the original provider or a collection agency, negotiation can be an effective strategy.

Many healthcare providers offer financial assistance programs, often referred to as charity care or hardship assistance, which can reduce or even eliminate medical bills based on income and other criteria. Alternatively, negotiating a reduced settlement with a collection agency is possible, as these agencies purchase debts for a fraction of their original value and may accept a settlement between 30% to 80% of the outstanding balance. Establishing a payment plan with the provider or collection agency can also prevent the debt from further negatively impacting credit. Any agreed-upon settlement or payment plan should be obtained in writing.