While medical expenses are rarely planned, their financial consequences can linger, potentially lowering your credit score and raising red flags for lenders. With recent changes in how credit bureaus report medical debt, understanding its effects on your financial profile is more crucial than ever. In this blog, we’ll explore the connection between medical debt, creditworthiness, and homeownership, providing practical tips to navigate these challenges and achieve your dream of owning a home.
On January 7th, 2025, the Consumer Financial Protection Bureau (CFPB) finalized its rule, removing medical bills from credit reports. This will remove an estimated $49 billion in medical bills from the credit reports of 15 million Americans. The CFPB’s research reveals little correlation between payment of medical debts and other bills and shows it is not a good predictor of whether they will repay a loan. The CFPB believes the new rule should increase credit scores sufficiently enough to allow for 22,000 approvable mortgages annually.
Why was this necessary?
Medical collections occur when unpaid medical bills are transferred to a debt collection agency. These debts can appear on your credit report, potentially lowering your credit score and signaling to lenders that you may struggle to manage financial obligations. For millions of Americans, unexpected medical expenses and inadequate insurance coverage have led to substantial medical debt, disproportionately affecting low-income families and exacerbating financial inequality. Medical collections on credit reports have historically made it harder for individuals to secure loans, including mortgages, leaving many unable to achieve key financial milestones like homeownership.
Additionally, due to the confusing nature of medical billing, the payee often doesn’t understand why they are receiving a bill and why they need to pay it. The problem worsens because the collections are usually challenging to remove from credit reports.
“People who get sick shouldn’t have their financial future upended,” – CFPB Director Rohit Chopra.
What are the effects of a medical collection on credit?
While medical collections are not technically considered in directly underwriting a mortgage, they affect a person’s credit score. The credit score is evaluated in a mortgage application. According to Experian, a medical collection can drop a person’s credit score up to 100 points. The credit score minimum for a mortgage is usually 620.
For example, if you applied for a mortgage with a credit score of 690 and you had a medical collection show up during the application, you could get turned down because your credit score could drop to 590. While an application with a 690 would generally be approved, a mortgage application with a credit score of 590 usually gets turned down.
What should you do now?
The new CFPB rules help protect consumers from the harms of medical debt and coercive debt collection practices. If you have a medical collection on your credit report, it might be best to do nothing and wait until March 7th, 2025, when the new rules go into effect.
If you are planning on buying a home, make sure to continue paying all your bills on time and keep your available credit used somewhere around 30%. If you are struggling with your credit, we are here to help and have ways to improve your score. Reach out to one of our loan advisors today to see where you stand and make a plan.