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Collection Accounts during Mortgage Process
We are going through the mortgage process, we are waiting for the appraisal at the moment. However we just received notification that an unpaid medical bill for $149 just hit the coborrowers credit report. Could this derail our loan process and cause our loan to be declined?
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1 Reply
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This situation is alarming, but it’s not the absolute end of your loan application process. Medical collections are treated differently than non-medical collections. Non-medical collections can affect the mortgage process and may derail your mortgage approval. However, mortgage lenders often ignore medical collections. However, any medical or non-medical collections can impact your credit scores. Let’s analyze the effect of the situation in question and the possible measures you may take. You can get approved for a mortgage with a brand new medical collection on your credit report. However, the drop in credit scores may become an issue.
Impact on credit score:
- A co-borrower will not be bothered too much by a missing payment of a small medical bill of $149.
- This is especially true if their credit score is good otherwise.
- There is damage to one’s credit, although such negative items can only affect it to a certain degree.
Loan process implications:
- Most lenders have room for minor credit issues that crop up during the mortgage process.
- Most lenders understand that it is nigh impossible not to incur medical debt, and even if one stays, nothing is sought.
Timing is important:
- It’s a minor plus that you have already started the mortgage process and are simply waiting for an appraisal.
- Many applicants seeking loans are usually denied because of changes in credit history during loan underwriting.
Communication is key:
- You must notify your loan officer of this issue as early as possible.
- The fact that there is too much information at hand helps inform the lender that you are responsible for matters like that, and the problem is solved early on.
Options to consider:
- Pay the bill right away if it can be done.
- Dispute the bill if it’s an error definition
- Send in a letter of explanation to your lender.
Lender’s perspective: Lenders’ main interest is generally whether the mortgage will be paid back. A small medical bill, however, is less serious than a non-medical collection account.
Debt-to-Income Ratio:
A $149 bill will likely maintain one’s debt-to-income ratio, a critical determinant for lenders.
Potential for rapid rescore:
- If the bill payment will largely improve the co-borrower’s credit score, then it would be rational to inquire about a rapid rescoring from the lender.
- This allows you to change your credit report much faster than waiting for the normal reporting time.
Overall financial picture:
- Lenders look at more than one aspect of your finances.
- If all other factors are good (steady earnings, positive repayment record, adequate equity), then this one factor is not likely to be a show-stopper.
- Whereas this situation is depressing and stressful, it is important not to lose your head.
Here are the immediate next steps, as I usually advise people:
- Let your loan officer know of that situation as soon as possible.
- If no reimbursement is done, urgently contact the medical provider and the medical bill.
- Collect any relevant documents associated with the above-mentioned bill (when it was incurred, why it was not paid, and payment evidence if you pay it now).
- Ask your loan officer how this will affect your application and what they recommend you do.
- It is also advisable to be ready to provide a letter of explanation to your lender whenever requested.
- Lenders tend to prepare for last-minute issues like these.
Of course, I cannot assure you that even if you owe just one small unpaid medical bill, it won’t affect your loan. However, this is usually one of the minor issues easily overcome during mortgage acquisition.