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How Do Lenders View Medical vs Non-Medical Collections
My husband has outstanding collection accounts. Over 95 percent outstanding collection accounts on his credit report are medical collections. We have spoken to several mortgage companies and they said the medical collections need to be paid off because they treat medical collections the same as non-medical collections. These medical collections is what is keeping his score low and therefore they turn us away and reccomend debt consolidation companies to us. I have read FHA loans treat medical collections differently and so far I find it untrue. What is true in this case? I am beyond frustrated by this. It is cheaper to have a mortgage than rent in my area and it’s time for us to buy but we have this barrier.
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1 Reply
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I don’t know what lender would tell you that but medical collection accounts are not treated like non-medical collection accounts on FHA, VA, USDA, and conventional loans. Normally, medical collections are often ignored and does not matter no matter how large the medical collection is. Non-medical collections does not matter either. However, with non-medical collection accounts that is larger than $2,000, HUD requires the mortgage underwriter to take 5% of the outstanding non-medical collection account balance and use it towards a hypothetical debt-to-income ratio when calculating the borrower’s debt-to-income ratio. Therefore, lets take a case scenario where a borrower has $10,000 in non-medical collections. HUD requires the underwriter to take 5% of the $10,000 or $500 and use the 5% as a hypothetical debt. The borrower does not have to pay that but it is a hypothetical debt. Borrowers with large outstanding non-medical collection accounts can hurt their debt-to-income ratio where due to the large outstanding medical collection account, they cannot qualify for a mortgage loan. In cases where borrowers have large outstanding collection accounts, they can set up a written payment plan with the creditor and use the agreed upon monthly payment instead of the 5% of the oustanding collection account balance. This 5% hypothetical debt only applies to non-medical collection account balance and not charge-off accounts.
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