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CAN RECENT UNPAID MEDICAL BILL CAUSE LOAN DENIAL ON FHA LOAN
Can an unpaid medical bill that just went in to collections cause you to be declined for your FHA mortgage?
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Failing to pay a medical bill that has been sent to collections can affect your FHA mortgage approval but usually does not cause an outright denial. Here’s what you need to know:
Medical Collections According to HUD Guidelines
Different Treatment: In general, HUD guidelines treat medical collections more favorably than other types of debt. They often need to include medical collections in calculating the debt-to-income (DTI) ratio. They are less likely to adversely impact your ability to get approved for an FHA loan.
Not Required To Pay Off: Unlike non-medical collections, medical collections are not required under FHA rules to be paid off before qualifying for a loan.
Effect on Credit Score
Credit Score at Risk: Your credit score could drop because bills went into collections. Even this would not hurt your chances of getting an FHA mortgage by itself if all other factors meet minimum standards set forth by lenders who follow Federal Housing Authority guidelines (usually 580+ for a 3.5% down payment). But if such a decrease brings your rating below the lender’s required minimums, then yes, they may deny it.
Overall Creditworthiness Assessed: The potential impact varies with overall credit history. A single bad mark like this might have little effect. At the same time, multiple derogatory items could raise eyebrows among those reviewing applications from potential borrowers seeking federally guaranteed home loans backed by private sector participants known collectively as Ginnie Mae or GNMA. This includes Fannie Mae (FNMA), Freddie Mac (FHLMC), and others.
Discretionary Power of Lenders
Manual Underwriting Possible: A lender could do manual underwriting if concerns arise over your credit score due to medical collection(s), even though the same falls within an acceptable range. Manual underwriting is necessary when evaluating the risk associated with extending credit. It looks at income stability, assets held, and details behind occurrences leading up to such debts originating from healthcare providers’ charges incurred by the patient(s) they treated.
Lender Overlays: Some lenders may have additional rules regarding collections or medical debt beyond what HUD generally requires. Always communicate with the lender about this subject early on in the process.
Ways to Lessen Impact
Explain Circumstances: A letter of explanation can help if recentness applies here. Especially when an unexpected emergency caused them through no fault of their own, nor could it be anticipated. This led to various medical facilities charging for services rendered, which eventually became unaffordable given the limited means available at that point, rendering such bills unpaid.
Arrange Installment Agreement: Try and work something out with collectors where you pay over time instead of a lump sum. Providing proof thereof to the underwriter will show you are serious about resolving outstanding obligations represented by the bill being discussed currently within your credit report as having gone bad due to non-payment issues while the rest remained in good standing or paid off already, thereby helping your cause greatly towards approval success being achieved ultimately.
In closing, while an unpaid medical bill sent to collections can potentially impact securing an FHA loan, there should still be nothing much to worry about once everything else looks great financially on paper. Guidelines are flexible, especially regarding this category. However, always keep talking openly and honestly with the lender to address any concerns head-on without unnecessarily prolonging the process.
Please feel free to ask more questions or seek further clarification where required!