Breaking Down the Shift in Medical Debt Impact on Mortgage Loans and Credit Scores

Today, I am bringing you some critical updates in the realm of credit scores and medical collections. Our mission at NestMade Mortgage is to ensure you're the most informed homebuyer possible, and to that end, I'm here to share with you some recent shifts that could potentially impact your home buying journey.

Traditionally, medical debts have cast a considerable shadow on credit scores for up to seven years. To put it in perspective, if a medical collection was the sole negative entry on your credit report, it could potentially plunge your credit score by 100 points or more. However, as we step into a new era of credit reporting, the impact of medical collections on your credit score is seeing a significant transformation.

According to a recent report by the Consumer Financial Protection Bureau (CFPB), the presence of medical debt in collections on American credit reports fell dramatically between 2020 and 2022, with a reduction of 17.9%, or 8.2 million Americans. Although medical debt accounted for a staggering 57% of collections trade lines, this still exceeded the combined total from all other sources, including credit cards, personal loans, utilities, and phone bills.

Starting January 1st, 2023, the three major credit bureaus - Equifax, Experian, and TransUnion - implemented a new practice where they no longer include paid-off medical debts or medical debt collections under $500 on customer credit reports. However, if you owe $500 or more, be aware that it may still appear on your report and potentially impact your credit score.

This shift significantly impacts your journey as a home buyer, particularly when we talk about mortgage loans. In the past, it was mandatory that combined collection and charge-off accounts, which included medical collections, be fully paid prior to or at closing. Now, the rules have changed. Medical collection accounts no longer need to be paid off at or prior to closing, and they shouldn't be included in the combined total of collections and charge-offs.

The criteria for settling these debts depend on several factors, including whether the property in question is a primary residence, a second home, or an investment property, and the combined total of your accounts. For example, for investment properties, any individual account, excluding medical, must be paid before closing if the balance is $250 or more.

To illustrate the potential benefits of this new credit landscape, consider a real-life example where medical collections were settled for a lower amount. This strategy alone improved a borrower's credit score by nearly 100 points, enhancing the loan's pricing by five tiers. On a $500,000 loan, this translates to $12,500 in pricing savings.

Here at NestMade Mortgage, our goal is to guide you on the best path to your dream home. We offer free consultation and credit upgrading services. If you're planning to buy a home, consider reaching out to us. Let us help you navigate these changes and potentially upgrade your credit.

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