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Do unpaid medical bills affect buying a house? They most certainly influence the mortgage loan application and approval process in two very profound ways.
First, unpaid medical bills will inflate your debt to income ratio. Lenders use this fraction to determine how much home you can afford without falling behind on payments.
Second, medical debt can appear on your consumer report. When it does, it usually hurts your credit score. This can influence your mortgage loan approval and the interest rate you must pay.
However, it does not mean that you will be stuck renting for the rest of your life. Explore several strategies to improve your eligibility in both areas.
Medical Bills Affect Home Loan Debt to Income Ratio
Unpaid medical bills affect your home loan Debt to Income (DTI) ratio when you are buying a house. Originators use this fraction to determine how well you can handle future payments. They divide your monthly payments for all obligations by your gross monthly income in order to arrive at two sets of figures.
- Front End DTI – counts your primary housing expenses, which includes principal, interest, insurance, and real estate taxes. The recommended cap 28%.
- Back End DTI – counts your front-end component and then adds all other borrowing commitments including car loans, auto leases, student loans, minimum credit card payments, and other obligations expecting to last 10 months or longer. The recommended cap is 36%.
Home loan originators will include unpaid medical bills into the back end calculation if you expect to take more than 10 months to retire the obligation. You can adjust by purchasing a smaller house or finding a way to reduce or restructure your obligations.
If your unpaid medical bills are stopping you from getting any home loan because of a high backend DTI, then a relief or settlement program may be a good first step. If successful, you reduce what you owe. However, this process takes time. Therefore, you will have to continue renting for a season.
Do you qualify for debt relief? If you owe more than $10,000 in unsecured liabilities, a settlement program may be a good fit. Unsecured liabilities include revolving accounts, personal loans, and the amounts you owe doctors, dentists, and hospitals for past services.
Debt settlement can affect credit scores. Verify the impact on your mortgage qualifications before taking this step.
Debt consolidation is another alternative if your unpaid medical bills are keeping you from getting the home loan. You could qualify for that dream home right away only if you can push your back-end DTI a little bit lower. Stretching out the repayment terms can lower the fraction.
Request a debt consolidation loan to elongate repayments terms. If approved, use the resources to retire your outstanding medical bills. You still owe the same amount of money, but your monthly payment may be smaller. The lender will charge interest and/or an origination fee. Include this in your calculations.
This approach has one other benefit. It can immediately improve your credit report and score when the collection agency updates your account from unpaid to paid. As you will shortly see, satisfying unpaid medical bills is the best strategy for qualifying for a home loan. The other options are less appealing.
Medical Debt Affects your Mortgage Loan Credit Score
Medical debt can appear on your consumer report, which may affect your mortgage loan credit score when buying a house. A collection account reported on your file will lower your credit score. The bank will factor this into their underwriting equation and will respond in one of three ways.
- Decline the application because of a poor rating.
- Approve the application with a higher interest rate.
- Reject the application due to a higher interest rate pushing DTI too high.
Once the negative information appears on your consumer report, your chances of qualifying for a mortgage loan diminish. You can respond by attempting to remove the information from your files, or by waiting for it to disappear.
Medical debt matters on your mortgage application because of the impact on your credit report. One piece of negative information on your file could be the difference between an approval and a denial. If you want immediate results, you need to file a dispute.
Disputing information on your consumer report is not a guarantee that the black mark will disappear. Taking proactive steps before the bill reaches the collection agency is your best defense. After that, your chances of success are greatest when bureaus mix consumer data together, and when duplicate entries appear for the same obligation.
Wait to Fall Off
Medical debt can keep you from getting your mortgage approval for a very long time. If you cannot reach a settlement, consolidate, or dispute the negative information, you may have to wait.
The information eventually falls off your file. Then, your credit score immediately improves. In addition, as time goes on the credit score puts less weight on your negative history.
Medical debt falls off of your report 7 or more years after the date of first delinquency. The original collections account ages off after 7 years.
However, the collection agency can file suit up until the time that the statute of limitations expires in your state. If successful, the county will file the civil judgment as a public record. Companies gather public record information and report the data to the bureaus. Civil judgments remain on your record for 7 years after the filing date.
- Public records on bureau reports
- Mortgage debt to income ratios
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