How Are Medical Collections During Mortgage Process Treated
This BLOG On How Are Medical Collections During Mortgage Process Treated Was UPDATED On February 16th, 2019
Home buyers can qualify for a mortgage with outstanding collection and charged off accounts. Borrowers do not have to pay outstanding collections and charged off accounts to qualify for FHA Loans. Collection Agencies are agencies who either own the debt or are representing creditors who have not been paid by the debtors. Creditors have assigned the account to either their collection department and/or an outside third party collection agency.
- A mortgage applicant can still get a mortgage with open unsatisfied collection and charged-off accounts
- Borrowers do not have to pay off a collection account with a credit balance in order to qualify for FHA Loans
However, lenders classify collection accounts into two categories:
- Non-medical collections
- Medical collection accounts
In this article, we will cover and discuss qualifying for a mortgage with outstanding collection and charged-off accounts.
FHA Guidelines On Non-Medical Versus Medical Collections
- Effective 2018, the Federal Housing Administration, FHA, has implemented new mortgage guidelines on non-medical collections and on medical collections
- Medical collections are treated differently than non-medical collection account in the mortgage underwriting guidelines for 2018
Non-Medical Collection Accounts
Non-medical collection accounts are any unpaid, unsatisfied collection accounts that are not medical.
- For example, the following are examples of non-medical
- unsecured credit card collections
- automobile repossessions
- installment debt collections
- utility collection accounts
- any other creditors or collection agencies that do not represent a medical industry is classified as non-medical collections
- Non-medical collection accounts with a credit balance do not have to be paid to get mortgage approval
- However, effective 2018, if there is a balance on an unsatisfied non-medical collection account that is a total of $2,000 outstanding balance
- 5% of the balance of the unpaid collection account will be used as a monthly expense and be counted towards borrowers debt to income ratios
- Borrowers do not have to pay anything
- This will be a hypothetical debt
Does Unpaid Collection Accounts Need To Be Paid?
The collection account does not have to be paid nor does any payment needs to be made on a monthly basis. However, the 5% calculation will be used as a hypothetical debt:
- Borrowers with large unpaid collection accounts can have an issue to this rule
- However, borrowers with large outstanding balances on collection accounts, mortgage guidelines will accept a written payment agreement with the collection agency with a monthly payment in lieu of the 5%
- For example, borrowers with outstanding balance on a collection account of $20,000, 5% of the unpaid $20,000 will be used towards debt to income calculations or $1,000
- A $1,000 monthly payment is equivalent to a $200,000 mortgage
- This will greatly impact borrowers debt to income ratios
- However, setting up a written payment agreement with the collection agency where the agreement is to pay $100 per month versus the $1,000 per month, the $100 per month per payment agreement will be used towards debt to income calculations by underwriters
Medical Collections Versus Non-Medical Collections
Medical collections are treated more favorably and differently per 2018 mortgage lending guidelines than non-medical collections:
- Borrowers can have unpaid collections with credit balances with medical collections
- Taking 5% of outstanding collection balance does not apply with medical collections
- With medical collections, no percentage of the unpaid collection balance will be taken into account in calculating debt to income ratios like it is the case with non-medical collections
- On the above example where you have a $20,000 unsatisfied unpaid collection account, if that balance is a medical collection, the underwriter will not take 5% of the unpaid balance in calculating debt to income ratios
- No percentage of the unpaid collection balance will be used towards calculating debt to income ratios
Disputing Derogatory Credit Items On Credit Report
Many consumers either hire a credit repair company and/or try to remove derogatory items by themselves by disputing derogatory credit items.
- 2018 mortgage lending guidelines on disputing derogatory credit items are now in full force
- Borrowers cannot have an active pending credit item dispute on a non-medical collection account with a credit balance over $1,000
- Credit disputes are not allowed on charged off accounts, late payments, or other derogatory accounts with the exception of medical collection accounts
- Borrowers with active credit dispute on credit report, mortgage process will come to an abrupt halt until they retract the disputed items
- Credit disputes on non-medical collections with zero balances are exempt
- Again, these are for non-medical collections, charge offs, late payments, and any other derogatory items
Credit Disputes During Mortgage Process
To proceed with the mortgage application process, borrowers need to either pay off the disputed items or retract dispute with the three major credit reporting agencies and/or the disputed creditor and/or collection agency.
- Unfortunately, if borrowers retract dispute on credit report, credit scores will most likely drop
- Anytime consumers retract a dispute, credit scores will drop
- Sometimes the credit scores can drop as much as 100 points depending on the situation
- Credit disputes with no credit balances are fine and do not need to be retracted
The above case does not apply for medical disputes. Borrowers can have disputes on medical collections with open collections and this rule does not apply.
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