For the loan approval itself, medical collections almost never matter. FHA, Conventional, VA and USDA all carve medical debt out of their collection rules, so a hospital bill in collections won't add a payment to your debt-to-income ratio or have to be paid before closing.
What each program says about medical collections
- FHA: HUD leaves medical collections out of the $2,000 cumulative total that triggers FHA's collection rules. Disputed medical accounts are also left out of FHA's $1,000 limit on disputed accounts and need no documentation.
- Conventional: Fannie Mae's Selling Guide excludes medical collections from its payoff limits and doesn't require them to be paid at or before closing. Lenders don't have to investigate a disputed medical account either.
- VA: VA doesn't require collection accounts of any kind to be paid off to approve the loan.
- USDA: The USDA handbook states that it doesn't require medical collection accounts to be paid.
How the credit bureaus handle medical debt
Equifax, Experian and TransUnion changed how they report medical collections. Once a medical collection is paid in full, it comes off the report. An unpaid medical bill has to wait one year before it can show up as a collection, up from six months. And medical collections that started under $500 were removed entirely.
Any medical collection still on your report is unpaid, at least a year old and $500 or more. It can still pull your score down, and the score is what sets your FHA down payment (3.5% at 580 and up, 10% from 500 to 579) and decides whether Conventional is open to you at 620.
A worked example: $6,500 medical, $900 non-medical
A buyer earns $5,200 a month with $500 of monthly debts. The report shows a $6,500 emergency room collection and a $900 collection from an old utility account.
Under FHA, only the $900 counts toward the $2,000 line, and $900 is under it, so the lender adds nothing to the debt ratios. FHA's 56.9% total ratio allows $2,958.80 of debt payments on $5,200. Subtract the $500 of existing payments and $2,458.80 is left, so FHA's 46.9% housing limit of $2,438.80 becomes the cap on the house payment.
If the emergency room bill counted like any other collection, the total would be $7,400 and FHA's 5% rule would add $370 a month. The cap on the house payment would fall to $2,088.80.
| Medical excluded (the actual rule) | If medical counted | |
|---|---|---|
| Collections in the $2,000 test | $900 | $7,400 |
| Monthly debt added | $0 | $370 |
| Maximum house payment | $2,438.80 | $2,088.80 |
| Approximate price with FHA at 3.5% down | $316,000 | $266,000 |
The prices assume a 5.75% rate on a 30-year fixed, taxes at 0.90% and insurance at $250 a month. For this buyer, the medical exclusion is worth about $50,000 of buying power.
When paying a medical bill helps
Paying a medical collection is the one collection payoff that reliably helps a credit score, because a medical collection paid in full comes off the report entirely. A buyer a few points under 580 or 620 can sometimes clear a medical bill, have the lender run a rapid rescore, and see the higher score within days.
- Check the insurance first. Billing errors are common. If insurance should have paid, ask the provider to rebill the claim.
- Ask about financial assistance. Under federal tax law, nonprofit hospitals must have a written financial assistance policy, and many reduce or forgive bills for households under an income limit.
- Keep the paid-in-full letter. If a report hasn't caught up with a payment yet, the letter lets the lender request the update during a rescore.
The affordability calculator shows the price your income supports with medical bills set aside. To see which accounts actually touch your score, call AAA Capital Funding at 888-601-8344; we'll pull a tri-merge report and sort the medical accounts from the rest.