FHA Loan with Medical Collections
Most collections or charge offs on your credit report will negatively impact your ability to qualify for a mortgage. In some instances, you may still qualify but for a lesser amount if the unpaid balances are being counted against you in your back-end debt to income ratios (DTI).
Can I Get an FHA Loan with Medical Collections?
You can still get an FHA loan even if you do have medical collections. Although you still need to qualify for the loan based upon the rest of the FHA guidelines, the medical collections will not be held against you.
Getting an FHA loan with medical collections is possible, as FHA guidelines are more lenient, typically allowing approval even if medical collections are present, provided your overall credit profile meets other requirements
Most applicants we work with have medical collections. With decades of experience, we can help you to get approved for an FHA loan. If you need help or just have questions, simply complete this short form to speak with one of our FHA loan officers.
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Guidelines – FHA Loan with Medical Collections
These are the basic FHA guidelines related to “disputed” medical collections:
- Medical collections are exempt from how non-medical collections are treated.
- Medical collections will not be used in the DTI calculation regardless as to what those medical payment balances are.
- FHA Lenders should not take medical collections into consideration in any way when underwriting your FHA loan.
*One interesting aspect of this that is written in the guidelines is they refer to DISPUTED medical collections. We are not sure whether a lender will necessarily verify whether the collection was disputed. However, it would be a good idea to file a formal dispute for these collections prior to applying for an FHA loan. Do it in writing and keep a copy for your files.
How Do You Know if You Have a Medical Collection?
You may not now that the collection exists until the lender runs your credit report. Doctors will place you for collection even for a small amount of $20. It is a good idea to periodically check your credit report for this type of activity and for anything else that may look to be incorrect.
Medical collections are the most common of all collection types. If you receive a collection letter, immediately file a dispute in writing. This may keep the collection off of your credit report. If the balance is very small, it actually makes sense just to pay it even if you do not believe you should.
FHA Guidelines on Non-Medical Collections
FHA guidelines stipulate that you do not have to pay any non-medical collections that are on your credit report if their combined total is less than $2,000. However, those collections may count towards your debt to income ratio. As a result, you may need to pay some or all of these to qualify for your FHA loan.
If your non-medical collections are over $2000: (Example $5,000)
- 5% of the total collection balance (in the example, $250) will be used on your loan application as a monthly obligation. This will not actually have to be paid but it is used against you when qualifying AS IF you were paying it.
- You can instead agree to a monthly payment amount with the creditor or collection agency.
- If the agreed upon payment amount is $75 per month for example and you have that in writing, then the lender will only use $75 on your loan application as a monthly obligation.
This is an excellent way to help you to qualify for an FHA loan or to afford a more expensive home.
Applying for an FHA Loan with Medical Collections
When applying for an FHA loan with medical collections, understanding how different FHA-approved lenders handle these situations is helpful. While the FHA guidelines affirm that medical collections do not need to be fully paid off to qualify, individual lenders may have their own requirements and preferences. This is called a lender overlay.
Some lenders may indeed prefer that any outstanding medical collections be fully paid off before the loan is approved, while others may simply require evidence of a repayment plan in place to address the debt. We will not require you to pay off your medical collections.
Impact on Loan Approval
The presence of medical collections can still impact your debt-to-income (DTI) ratio. This ratio plays a critical role in the loan approval process as it relates to your ability to manage monthly payments in relation to your overall income. Lenders might calculate a monthly payment equivalent to 5% of the outstanding balance of medical collections, factoring it into your DTI.
This aspect underscores the importance of addressing and resolving any outstanding medical collections before pursuing an FHA loan. With high-value collections, even a minimal 5% calculation can notably impact your DTI ratio, potentially influencing your loan approval.
Impact of Settled Medical Debts
Settling medical collections rather than leaving them unpaid can positively impact your credit score and your loan approval. The effect may vary based on other aspects of your credit profile, but consistently addressing and resolving outstanding debts showcases financial responsibility and can contribute to an improved credit standing.
Addressing medical collections is like tending to weeds in a garden. By actively tending to them and ensuring they don’t grow uncontrolled, you maintain the overall health and appearance of your garden. Similarly, by addressing and settling medical collections, you tend to the health of your financial profile, promoting its strength and stability over time.
Handling existing medical collections plays a pivotal role in showcasing financial responsibility and commitment to addressing outstanding debts—an essential component in the journey toward obtaining an FHA loan.
Letter of Explanation
As part of your application, you may be asked to provide a Letter of Explanation detailing how medical debt accrued, how it’s being managed, and why it won’t affect your ability to repay the FHA loan. This letter gives you an opportunity to provide context around any financial challenges related to medical expenses.
Our loan officer will help guide you on what to write, but your letter should be sincere and forthcoming, emphasizing how medical debt came about and outlining the steps you’ve taken to address it while maintaining financial stability. Explain how these circumstances won’t hinder your ability to meet loan repayment obligations.
For example, you might highlight a sudden illness or injury that led to medical expenses and share how you’ve worked on payment arrangements with healthcare providers in good faith. This narrative adds depth and understanding to what might otherwise appear as just numbers on a credit report.
By presenting a thorough collection of documents alongside a sincere Letter of Explanation, you can paint a detailed and compelling picture of your overall financial situation. This effort enhances the transparency and completeness of your FHA loan application.
Can I get an FHA Home Loan if I am Delinquent on a Federal Debt?
If you have a federal debt appearing on your credit report, the lender needs to verify whether the debt is still outstanding. If the federal debt is valid and delinquent, then you will not be eligible for an FHA loan.
Examples of a federal debt:
- Prior FHA mortgages that may be outstanding and past due
- Federally backed student loans that are in default
- IRS debt that is owed
- Any other federal debt
If you are thinking of buying a home and you would like to qualify for an FHA loan, then speak with one of our FHA Lenders. They can help guide you on how to handle any medical or non-medical collections on your credit report in a way so that you can qualify for an FHA loan.
Related Questions
Do FHA lenders view medical collections differently than other types of debt?
FHA lenders often view medical collections differently than other types of debt. Unlike other debts, FHA guidelines allow for the exclusion of medical collections totaling less than $2,000 from the borrower’s debt-to-income ratio. This means that these medical collections may not negatively impact the borrower’s eligibility for an FHA loan. However, it is important to note that this exclusion only applies to medical collections and not other types of debts.
How do medical collections affect my eligibility for an FHA loan?
Medical collections can impact your eligibility for an FHA loan, as any outstanding debt can affect your credit score and debt-to-income ratio. However, the good news is that recent changes in FHA loan guidelines have made it easier for borrowers with medical debt to qualify. As of 2024, FHA loans no longer automatically disqualify applicants with medical collections, recognizing that these debts often result from unavoidable circumstances. Instead, lenders now evaluate the borrower’s overall creditworthiness and ability to manage debts. Improving your credit score and paying off any outstanding medical debt to increase your chances of FHA loan approval.
What can I do to improve my chances of getting approved for an FHA loan with medical collections?
To improve your chances of getting approved for an FHA loan with medical collections, there are a few steps you can take. First, focus on paying off any outstanding medical collections as soon as possible, as this shows responsibility and financial stability. Second, work on improving your credit score by consistently making payments on time and reducing any other outstanding debts. Finally, gather and provide all necessary documentation to clearly explain any extenuating circumstances surrounding the medical collections, such as a valid reason for the unpaid bills or proof of insurance coverage. According to recent statistics from the Federal Housing Administration, borrowers with lower credit scores have been able to secure FHA loans by demonstrating responsible financial behavior and taking steps to rectify outstanding debts.
Can I still qualify for an FHA loan if I have outstanding medical collections?
Yes, it is still possible to qualify for an FHA loan even if you have outstanding medical collections. The Federal Housing Administration (FHA) has specific guidelines that allow borrowers with medical collections to still be eligible for an FHA loan. These guidelines take into consideration that medical debt is often unavoidable and can be a result of unforeseen circumstances. As long as the borrower can demonstrate a willingness and ability to repay the loan, the FHA may approve the loan application. According to a study conducted by the Urban Institute in 2019, more than half of FHA borrowers had some form of medical collection on their credit report, highlighting the common occurrence of this issue.
Are there any specific requirements or guidelines in regards to medical collections for an FHA loan?
Yes, there are specific requirements and guidelines for medical collections when applying for an FHA loan. According to the current FHA guidelines, medical collections do not have to be paid off to qualify for an FHA loan. However, borrowers must be able to provide documentation showing the amount owed and any payment arrangements or plans in place. Additionally, if the total outstanding medical collections exceed $2,000, lenders may require borrowers to include a monthly payment into their debt-to-income ratio calculation, which could impact loan eligibility. It’s important to consult with a qualified mortgage professional for specific details and advice tailored to your situation.
How does the FHA handle non-medical credit disputes?
If your non-medical credit disputes total $1,000 or more, then all of the disputes must be retracted and added back to your credit report as an open collection. Then, the loan must be underwritten with those payments in your monthly obligation calculations. Remember, medical credit disputes are exempt.
How does the FHA handle credit charge offs?
The FHA mortgage guidelines require lenders to ignore charge off collections as if they do not exist. However, if you have any credit disputes related to these charge offs, they must be reinstated and added to your monthly obligations in your FHA loan application.
Should I pay off the collections at closing?
If you plan to pay off your collections, then it is best to do it at the closing table. That can be part of the closing instructions and is the best way to handle it. The lender then is satisfied that the collections are being paid and closed. Also, doing it at closing will not negatively impact your credit score prior to close.
Are the interest rates higher for an FHA loan with medical collections?
The collections whether they are medical or non-medical will not impact your interest rates directly. However, your credit scores do have an impact on your FHA rate and as a result, the collections have an indirect impact on FHA interest rates.
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