Credit Scores, Medical Debt, and Buying a Home (2024)

FAQs

Can medical debt affect a mortgage? ›

In fact, the CFPB's analysis shows that medical debts penalize consumers by making underwriting decisions less accurate and leading to thousands of denied applications on mortgages that consumers would repay.

Medical debt is not reported to credit bureaus as long as it remains with your healthcare provider. If you don't pay the bill for at least three months, it could be sold to a collections agency. After one year, medical debts over $500 that are in collections can impact your credit score.

Following the release of a CFPB report in March 2022 that found that Americans owed $88 billion in unpaid medical bills, the three largest credit reporting agencies announced that they would no longer include paid medical debts, unpaid medical debts less than a year old, and medical debt under $500 from credit ...

Your debt-to-income ratio does not factor in your monthly rent payments, any medical debt that you might owe, your cable bill, your cell phone bill, utilities, car insurance or health insurance.

Judgments stay either seven years or until the statute of limitations in your state is up, whichever is longer. And here's one more caveat: While unpaid medical bills will come off your credit report after seven years, you may still be legally responsible for them depending on the statute of limitations.

Fair Credit Reporting Act File Disclosure: The maximum charge to a consumer under the FCRA for file disclosure increases effective January 1, 2024, to $15.50 from $14.50.

The FCRA permits health care providers and their agents to furnish information about medical debts to consumer reporting agencies (CRAs). However, the FCRA requires furnishers to encrypt certain information to protect the consumer's privacy.

The three nationwide credit reporting companies – Equifax, Experian, and TransUnion – also removed all paid medical debts from consumer credit reports and those less than a year old. They have also taken steps to remove all medical collections under $500.

Mortgage lenders want to see a debt-to-income (DTI) ratio of 43% or less. Anything above that could lead to the rejection of your application. The closer your DTI ratio is to that percentage, the less favorable your mortgage terms are likely to be. A Home Purchase Worksheet can help you determine your DTI ratio.

How much credit card debt is okay when buying a home? ›

You typically need to stay below 28 percent to be approved. The back-end ratio takes your total debt payment into consideration, including your credit card payment. You should aim to stay below 36 percent.

As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28%–35% of that debt going toward servicing a mortgage.

Both hospitals and debt collectors have won judgments against patients, allowing them to take money directly from a patient's paycheck or place liens on a patient's home. In some cases, patients have also lost their homes. Medical debt can also have a negative impact on a patient's credit score.

Those debts weigh on the people who carry them: Research has found that people who incur substantial medical bills (after a cancer diagnosis, for example) report cutting back on everyday spending, depleting their savings, and even downsizing their homes.

Your debt-to-income (DTI) ratio is a key factor in getting approved for a mortgage. Most lenders see DTI ratios of 36% as ideal. Approval with a ratio above 50% is tough. The lower the DTI the better, not just for loan approval but for a better interest rate.

Traditional lenders may not work with a borrower who has any collections on their credit report. But there are exceptions. A lender may ask a borrower to prove that a certain amount in collections has already been paid or prove that a repayment plan was created. Other lenders may be more flexible.