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Can medical bills stop you from buying a house? The short answer is, maybe. You might think you’re in the clear from medical bills, but one in five Americans covered by health insurance receives a surprise medical bill, even if the hospital was in-network. With millions of Americans struggling to pay off medical debt, many are concerned as to whether medical bills can stop them from buying a house. A 2019 Zillow report on housing trends found that 38% of homebuyers denied a mortgage were denied due to medical debt. Although medical debt is a barrier when it comes to mortgage application approval, it doesn’t mean it’s impossible to get a home loan.
How Medical Debt Affects Your Credit
As of September 15, 2017, the three major credit bureaus (Experian, TransUnion, and Equifax) set a grace period of 180 days for consumers to take care of any medical debt before showing as past due on their credit report. Considering 25% of Americans aged 24 to 54 have outstanding medical bills, it’s no surprise that there’s a policy in place to give relief to those with unpaid medical expenses.
After the 180-day grace period, unpaid medical debt is sent to a collection agency that may report it to the credit bureaus. Although this shows as a delinquency on your credit report, medical debt doesn’t have as much of an impact as other delinquencies. Can medical bills stop you from buying a house? The impact isn’t as heavy, but debt is still debt.
In most cases, collection accounts stay on your credit report for at least seven years, even if the debt is paid. Under the Fair Credit Reporting Act (FCRA), if you believe any information on your credit report is inaccurate, you have the right to dispute any claims.
Can Medical Bills Stop You From Buying A House?
First, consider the determining factors for mortgage approval. Medical debt not only affects your credit score, but it affects your debt-to-income ratio as well.
On the FICO credit scoring model, credit scores range from 300 to 850, and the score requirements needed for a mortgage vary by loan type and lender. Consumers have access to their free credit report once per year; if you’re thinking about buying a house soon, it’s a good idea to keep a close eye on your report. Here are the four main types of mortgages:
- Federal Housing Administration (FHA)
- Veterans Affairs (VA)
- United States Department of Agriculture (USDA)
FHA, VA, and USDA loans are federally assisted mortgage loans. FHA has a minimum FICO credit score of 580; VA loans are 580 to 620; USDA loans prefer a minimum score of 640. For buyers going the traditional route, the minimum FICO credit score for a conventional mortgage ranges from 620 to 640. If you had a high credit score to begin with, the hit to your FICO score due to medical debt likely wouldn’t be enough to deny your mortgage application. Medical debt isn’t a major indicator of credit risk.
Your debt-to-income ratio tells lenders how financially prepared you are to make timely payments on your loan. Your DTI is calculated by dividing your monthly payments by your gross monthly income. The maximum DTI depends upon your lender and loan type; however, due to the Qualified Mortgage Rule, the majority of mortgages have a maximum DTI of 43%. Sometimes, your lender might not factor your medical debt into your debt-to-income ratio, if you’ve been making on-time payments.
Don’t Let Medical Bills Stop You From Buying a House
Can medical bills stop you from buying a house? Yes and no. Debt isn’t a deal-breaker. Many Americans with outstanding debt are still buying houses, and there are steps you can take to improve your chances of mortgage loan approval. Monitor your credit report for any changes and dispute anything that you feel isn’t right. Compare different lenders and loan options and pick one that’s right for you and your situation. Don’t let debt and your medical bills stop you from buying a house.