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How Medical Debt Impacts Credit Scores and Mortgage Approval for Kentucky Homebuyers

Medical Debt and Mortgage Approval for Kentucky Homebuyers

Medical debt has long been a challenge for many Americans. It particularly affects credit scores and the ability to secure a mortgage loan. Fortunately, the Consumer Financial Protection Bureau (CFPB) has finalized a new rule. This rule is set to remove medical debt from consumer credit reports. As a result, more opportunities may open up for homebuyers in Kentucky. Here’s how this change can affect your mortgage approval process. Also, understand what you need to know about medical debt and credit scores in Kentucky.

What’s Changing with Medical Debt and Credit Reports?

The CFPB has implemented a new rule to remove medical debt from credit reports. This change is significant for borrowers in Kentucky. Medical debt often lowers credit scores. It creates hurdles in the mortgage approval process.

Here’s what to expect from the new rule:

  1. Implementation Timeline: The rule is expected to take effect in at least 60 days.
  2. Debt Removed: Over $49 billion in medical debt will be erased from credit reporting systems.
  3. Consumer Impact: An estimated 15+ million Americans will see their credit reports improved.
  4. Credit Score Boost: Consumers affected by this change could see an average credit score increase of 20 points.
  5. Mortgage Approvals: This change is anticipated to result in over 22,000 additional mortgage approvals annually across the U.S.

How Medical Debt Affects Credit Scores in Kentucky

Before this rule, unpaid medical bills often appeared on credit reports, negatively impacting credit scores. In Kentucky, this has been a common issue for homebuyers trying to secure mortgage loans.

Key Effects of Medical Debt on Credit Scores:

  1. Lower Credit Scores: Medical debt can drag down your FICO score, making it harder to qualify for favorable loan terms.
  2. Higher Interest Rates: A lower score often leads to higher interest rates on mortgages.
  3. Mortgage Denials: In some cases, excessive medical debt could result in outright denials of loan applications.

Even with medical debt on your report, mortgage lenders may consider compensating factors. These factors include stable income, down payment assistance, or other positive financial attributes.

How Credit Scores Impact Mortgage Loan Approval in Kentucky

Mortgage lenders in Kentucky use credit scores as one of the primary factors to determine loan eligibility. Here’s how it works:

  1. Credit Score Requirements by Loan Type:
    1. FHA Loans: Minimum credit score of 580 with a 3.5% down payment. Scores as low as 500 may be considered with a 10% down payment.
    2. Conventional Loans: Minimum credit score of 620 or higher.
    3. VA Loans: No minimum credit score set by the VA, but most lenders prefer a score of 580-620.
    4. USDA Loans: Minimum credit score of 640 for automatic approval, though manual underwriting is possible for lower scores.
  2. Impact of Credit Score on Interest Rates:
    Higher credit scores lead to better mortgage rates. Lower scores can result in higher monthly payments.
  3. Debt-to-Income Ratio (DTI):
    Lenders calculate your DTI to ensure you can manage your mortgage payments alongside other debts. Medical debt previously factored into this calculation, potentially increasing your DTI and reducing your borrowing power.


 Email – kentuckyloan@gmail.com 

   Call/Text – 502-905-3708

Joel Lobb
Mortgage Loan Officer – Expert on Kentucky Mortgage Loans


 Website: www.mylouisvillekentuckymortgage.com
Address: 911 Barret Ave., Louisville, KY 40204

Evo Mortgage
Company NMLS# 1738461
Personal NMLS# 57916

For assistance with Kentucky mortgage loans, reach out via email, call, or text Joel Lobb directly.

Kentucky Mortgage Broker Offering FHA, VA, USDA, Conventional, and KHC Down Payment Assistance Home Loans bad credit fha loans Kentucky, Collections Accounts, Disputed Accouts, KY FHA LOANS, mortgage charge-offs

Does FHA require collections to be paid off for a borrower to be eligible for FHA financing?

A Collection Account refers to a Borrower’s loan or debt that has been submitted to a collection agency by a creditor.
If the credit reports used in the analysis show cumulative outstanding collection account balances of $2,000 or greater, the lender must:
•     verify that the debt is paid in full at the time of or prior to settlement using an acceptable source of funds;
•     verify that the Borrower has made payment arrangements with the creditor and include the monthly payment in the Borrower’s Debt-to-Income ratio (DTI); or
•      if a payment arrangement is not available, calculate the monthly payment using 5 percent of the outstanding balance of each collection and include the monthly payment in the Borrower’s DTI.

Collection accounts of a non-borrowing spouse in a community property state must be included in the $2,000 cumulative balance and analyzed as part of the Borrower’s ability to pay all collection accounts, unless excluded by state law.   Unless the lender uses 5 percent of the outstanding balance, the lender must provide the following documentation:
•     evidence of payment in full, if paid prior to settlement;
•     the payoff statement, if paid at settlement; or
•     the payment arrangement with creditor, if not paid prior to or at settlement.

For manually underwritten loans, the lender must determine if collection accounts were a result of:
•     the Borrower’s disregard for financial obligations;
•     the Borrower’s inability to manage debt; or
•     extenuating circumstances.

The lender must document reasons for approving a mortgage when the Borrower has any collection accounts. The Borrower must provide a letter of explanation, which is supported by documentation, for each outstanding collection account. The explanation and supporting documentation must be consistent with other credit information in the file.

For additional information see Handbook 4000.1 II.A.4.b.iv.(M); II.A.5.a.iii.(D), II.A.5.a.iv.(O)  at https://www.hud.gov/program_offices/administration/hudclips/handbooks/hsgh

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Joel Lobb
Senior  Loan Officer
(NMLS#57916)
text or call my phone: (502) 905-3708
email me at kentuckyloan@gmail.com
The view and opinions stated on this website belong solely to the authors, and are intended for informational purposes only. The posted information does not guarantee approval, nor does it comprise full underwriting guidelines. This does not represent being part of a government agency. The views expressed on this post are mine and do not necessarily reflect the view of my employer. Not all products or services mentioned on this site may fit all people. NMLS ID# 57916, (www.nmlsconsumeraccess.org). Mortgage loans only offered in Kentucky.
All loans and lines are subject to credit approval, verification, and collateral evaluation and are originated by lender. Products and interest rates are subject to change without notice.
Kentucky Mortgage Broker Offering FHA, VA, USDA, Conventional, and KHC Down Payment Assistance Home Loans FHA Guidelines

FHA Removes Credit Rule

FHA Removes Credit Rule.

 

FHA Removes Credit Rule

In March of 2012, the Federal Housing Administration drafted a rule to help lower its risks to its emergency fund, which was to require borrowers to pay all collection accounts over $1,000.00 or have documented payment arrangements with them before a mortgage loan was approved. The rule went into effect April 1, 2012 but was delayed a week later to be revisited in July 2012 after industry comments were considered.

A combination of the inclining insurance premiums meant to support the FHA emergency fund that was close to needing a bailout and the new rule caused speculation that more business would be pushed to the GSE giants Fannie and Freddie. Industry experts did not support the new credit rule, especially lenders heavily reliant on first time homebuyer business and homebuilders.  According to the vice president of John Burns Real Estate Consulting, Lisa Marquis Jackson, 25% of builders they surveyed the week FHA announced the new rule anticipated loosing or delays in up to 60% of their sales.  The vice president of the firm went on to comment that the effect of the dispute rule would have a “notable impact on the housing market.”

Edward Mills, senior vice president of FBR Capital Markets commented about the difficulty in making choices to protect the insurance fund while still keeping mortgage credit available.

In a letter sent Friday by the FHA, the credit rule is revoked, though an FHA spokesperson advised they are still taking comments about the original proposal and will be issuing a new guidance very soon.