Navigating Medical Collections for Conventional Home Loans: An Updated Guide

Hello readers! Today, I bring you some significant news that could greatly impact many aspiring homeowners. For years, individuals with medical collections on their credit reports have been at a disadvantage when pursuing conventional loans. But there's a noteworthy shift in the winds.

What Exactly Are Medical Collections?

Medical collections arise when an individual receives medical services and is subsequently billed. If they're unable to pay the bill, they have a few choices. They can clear the amount in full, arrange a payment plan with the service provider, or, if they default, the debt might eventually go to collections, possibly resulting in a charge-off or judgment status.

This poses a question: how do these collections impact the home buying process? Previously, FHA loans and other similar types (VA and USDA) provided some flexibility regarding medical collections, allowing them to be overlooked. But conventional loans, often the more desirable route especially for those with larger down payments, remained out of reach for many with such collections.

The Game-Changing News

Thankfully, the landscape has changed. Medical collections are now not required to be paid off before closing on conventional loans, whether they're desktop or manually underwritten. So, what does this mean for you? Firstly, even if you've arranged a payment plan for the medical collection, that payment will not be held against you. Secondly, you no longer have to pay off the entire medical collection.

However, it's crucial to differentiate between medical collections and regular collections. While the former is becoming more accommodating, the latter, such as unpaid cell phone or cable bills, remains a challenge if their combined balance surpasses $2,000. This rule change will be effective from April 15th, 2023.

Navigating Medical Collections and Your Credit Score

While these updates are promising, it's essential to remember that medical collections can still dent your credit score. A proactive approach would be to explore options for "pay for deletion." By reaching out to the collection agency or even the original medical service provider, you might find they're willing to work with you, especially if extenuating circumstances led to the debt. Successfully negotiating a pay-for-deletion agreement can not only eliminate the collection from your report but also any associated negative payment history.

Whether you have a $50 or a hundred thousand dollar medical collection, it's crucial to note that these are perceived differently from consumer collections. However, don't mistake this flexibility as a free pass to accumulate medical debt.

Furthermore, for those with medical-related charge-offs, there's more good news: they too don't need to be paid off for a conventional loan. But be cautious with judgments, as they come with specific requirements, such as having a payment plan in place and ensuring no future liens on your property.

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Conclusion

This shift in approach to medical collections is indeed groundbreaking. It's a beacon of hope for many potential homeowners, opening doors previously closed. For anyone seeking clarity or with questions on this topic, whether it's about conventional loans or others like non-conforming loans, our team is here to guide you. Remember, each individual's financial situation is unique, and professional guidance can be invaluable.

Contact me, David Xie, at 757-478-8493. Our dedicated team at Xie Mortgage, powered by Nexa Mortgage, is eager to assist you. Until next time, stay informed and keep pursuing your homeownership dreams!