Skip to content

How Does Medical Debt Impact My Ability to Get a Mortgage?

Unfortunately, an estimated 41% of American adults, more than 100 million individuals, face medical debt. 12% of consumers in this county have healthcare-related bills totaling more than $10,000.

Facing this kind of debt burden can cause stress and anxiety, and used to have a huge impact on your credit score and your debt-to-income ratio (DTI), two major factors that mortgage lenders consider when applying for a home loan.

But recent changes to how medical debt is reported to the various credit bureaus could give you the boost you need to qualify for a mortgage, purchase a stable home for you and your family, and start building generational wealth.

Let’s explore how healthcare-related costs can affect your homebuying ability, and what steps you can take to mitigate the impact and maneuver yourself into a better financial position. 

Good News for Your Creditworthiness

In July 2022, Equifax, Experian, and TransUnion, the 3 nationwide credit reporting agencies, made a decision to make it easier for people with this type of debt to improve their scores. Many forms of medical bills have already disappeared from the credit reports of hopeful homebuyers.

Your credit score is one of the critical factors that lenders use to determine your ability to repay a loan, and it’s calculated in part on your bill-paying history. Missing or late payments have a negative impact, and defaults can stay on your report for up to seven years, making it harder for you to obtain a mortgage in the future.

But now, mortgage lenders like Fannie Mae, Freddie Mac, the Veteran’s Administration, and the Fair Housing Administration no longer consider healthcare debt or medical collections as an indicator of your creditworthiness.

The Consumer Financial Protection Bureau’s Office of Research points out that these kinds of bills are often erroneous and not always communicated appropriately to consumers, resulting in a high number of Americans with unwarranted collections actions that don’t reflect their true bill-paying history. 

Be Aware of Your Debt-to-Income Ratio

Your (DTI) ratio is another element that lenders use to determine your ability to repay a mortgage. Lenders prefer to see a DTI ratio of 43% or less, so if you have a larger one, it can be more difficult to obtain a mortgage. Even with the recent reporting changes, medical debt can still increase your DTI ratio, especially if you have a heavy debt burden and low income.

Under the new rules, healthcare-related bills under $500 will be removed from your report, as well as all paid collections. You’ll also have 12 months to address any medical debt in collections before it can have a negative effect on your payment history.

It’s important to check your credit report regularly and carefully review every medical bill you incur. As many as 80% of medical bills can contain errors and overcharges. Call or go online to confirm the correct amount due, and set up a payment plan immediately if you need to mitigate any chance of a hit on your credit score.

Gen X, Millennials, and Gen Z are particularly affected by medical debt

  • 25% of Millennials and Gen Z members have skipped paying rent to pay healthcare bills
  • 52% of Millennials and 48% of Gen X feel medical collections have harmed their credit score
  • 22% of the Gen Z cohort say they need to depend on crowdfunding to pay for skyrocketing healthcare costs

People facing this debt burden find it more difficult to save for major moves like saving to buy a home, taking a dream trip, or doing renovations on the home they currently own. But there is definitely light at the end of the tunnel.

How to Improve Your Financial Position

If you’re hoping to qualify for a home loan in Illinois, there are several steps you can take to brighten your outlook and make yourself more attractive to lenders. Partnering with an experienced mortgage broker can help you explore every option and get the home you deserve.

Boost Your Credit Score

Raising this number is one of the most effective ways to mitigate the impact of medical debt on your ability to get a mortgage. You can improve your score by paying your bills on time, reducing your overall debt, and disputing any errors on your credit report.

Strive to Lower or Eliminate Your Debt 

Paying off as much as you can improves your ability to get a mortgage. You can negotiate with just about any creditor to set up a payment plan to avoid collection actions or ask for a discount if you pay in full. It’s critical to exceed your minimum payments and take care of the debt with the highest interest rates first. 

A debt counselor or financial advisor can assist with creating a foolproof strategy to reduce your DTI as much as possible. It is important to note that I am not a credit or debt counselor, and this advice should be reviewed with your accountant or a licensed, accredited advisor. 

Increase Your Income

More people than ever are working two or more jobs. Some 16 million Americans (10% of the US workforce) are side hustling to make ends meet and to save up funds towards becoming a homeowner. 

Have you asked for a raise lately? The labor market is constantly evolving, with remote work becoming more common and heavy competition for top talent. It could also be time to take steps to land a better-paying job and climb your career ladder a rung or two.

Just remember that you should be in a stable financial situation when applying for a mortgage, and don’t make any drastic changes during the approval process, such as quitting to start your own business or jumping from guaranteed compensation to commission only

Within Your Reach

There are down payment assistance programs available in many local municipalities and the state of Illinois, and home loans guaranteed by the Federal Housing Administration are making it more accessible for hopeful buyers to achieve their goals. 

Making the decision to purchase a home is a big decision, and the process is complex, with a lot of moving parts. 
But it doesn’t have to be out of your reach. I’ve got more than 16 years of experience in the Chicago real estate industry, and I can help you navigate finding the perfect mortgage loan product and becoming a homeowner — schedule a consultation today!

Share:

Send Us A Message

Most Popular