Medical Debt Collections And Impact To The Homebuyer

Debts will no longer be treated as fiscal mismanagement like overdue car loans

Insider

Chief Operations Officer, Atlantic Bay Mortgage

In March of this year, the nationwide credit rating agencies (CRAs), better known as Experian, TransUnion and Equifax, announced a significant change to their score analysis model data. This announcement was regarding medical collections and their impact on the score.

Let’s start with the facts surrounding this change. As of July 1, 2022 the following changes will become effective:

Paid medical collection debt will no longer be included on consumer credit reports.
The time period before an unpaid medical collection debt will appear on a consumer’s report will be increased from six months to one year.

In the first half of 2023, medical debt collection accounts under a predefined minimum threshold (will be at least $500 and published later this year) will no longer be included on consumer credit reports.

The CRAs initial analysis suggests that once all three pieces are in effect, approximately 70% of medical collections will be impacted.

This is great news for the American public and their ability to obtain homeownership. The subject of medical collections has long been a topic of discussion. Most of the lending agencies (Fannie/Freddie/VA/USDA/FHA) have ceased counting it against the borrowers during the underwriting process.

The reason this has been a topic of discussion is due to the fine line between a negative debt occurrence and financial mismanagement. It is very different from a borrower taking out a car loan for $60,000 in which they then miss payments on. Most medical situations are not a debt that the American public are taking on due to their inability to manage their finances.

These changes will finally close the gap and allow many borrowers to qualify for homeownership that previously may not have been able to.

The lift that the underwriting guidelines have provided were a huge help over the last couple of years; however, didn’t have any bearing on the impact in minimum FICO score. These changes will finally close the gap and allow many borrowers to qualify for homeownership, that previously may not have been able to.

It will also provide some interest rate relief, as the FICO score has an impact on rate. Which in turn should help open up more opportunities for qualification.

We reached out to Experian to see if they had any insight on the significance of the change in score that we could anticipate on the heels of these changes. Unfortunately, currently there has not been a study for score impact, however, one is underway.

The lending community is incredibly hopeful that the impact from these changes will broaden the ability for many borrowers to qualify for the home of their dreams.