How Are Medical Collections During Mortgage Process Treated

This Article Is About How Are Medical Collections During Mortgage Process Treated

Medical collections are treated differently versus non-medical collections during the mortgage process. Medical collections are often treated very leniently by mortgage underwriters. Most medical collections are often ignored by underwriters no matter how much the outstanding balance is. In this article, we will discuss and cover how mortgage underwriters treat medical versus non-medical collections.

How Outstanding Collection Accounts Are Treated By Mortgage Underwriters

Homebuyers 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 that either own the debtor 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

FHA Guidelines On Non-Medical Versus Medical Collections

Effective 2021, the Federal Housing Administration, FHA, has implemented new mortgage guidelines on medical versus non-medical collections. Medical derogatory accounts are treated differently than non-medical collection account in the mortgage underwriting guidelines for 2021.

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

Do Outstanding Collections Need To Get Paid To Qualify For A Mortgage?

Non-medical collection accounts with a credit balance do not have to be paid to get mortgage approval:

• However, effective 2021, 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

Do 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 with this rule
• However, for 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, for borrowers with the 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.

Non-Medical Versus Medical Collections

Medical collections are treated more favorably and differently per 2021 mortgage lending guidelines than non-medical collections. Borrowers can have unpaid collections with credit balances with medical collections. Taking 5% of the outstanding collection balance does not apply to medical collections. With medical collections, no percentage of the unpaid collection balance will be taken into account in calculating debt to income ratios like 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. 2021 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 disputes on the credit report, the 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 the dispute with the three major credit reporting agencies and/or the disputed creditor and/or collection agency.

• Unfortunately, if borrowers retract dispute on the 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 to medical disputes.  Borrowers can have disputes on medical collections with open collections and this rule does not apply.