Starting July 1, 2022, some types of medical debt will not be shown in your credit report. What does this mean for your home-buying and mortgage plans?
Medical debt isn’t like other types of debt: it can show up without warning and never be repeated again – or it can be an ongoing, crippling financial strain. And it’s very easy to rack up; according to Healthcare.gov, the average cost of a 3-day hospital stay is a staggering $30,000!
Paying off healthcare debt is hard enough, but it can be especially dispiriting when you’re trying to save for a new house. Let’s look at what kind of debts are coming off credit reports, how they affect your credit score, and how this affects your future mortgage options.
Medical Debt and Your Credit Score
First of all, it’s important to note that not all medical expenses show up on your credit report. If you pay your healthcare provider for services as you receive them (or if you set up a payment plan and make the payments on time), this rarely affects your credit report; most healthcare providers don’t report to credit agencies.
But what happens if you don’t pay your bill? Usually, after several months have passed, your debt is transferred to a collection's agency – and this will show up on your credit report. It may also ding your credit score.
What Debt Is Being Removed?
In a press release, the three main credit bureaus (Experian, TransUnion, and Equifax) announced the following:
“After two years of the COVID-19 pandemic and a detailed review of the prevalence of medical collection debt on credit reports, the [credit reporting agencies] are making changes to help people to focus on their personal wellbeing and recovery.”
These changes can be summarized as:
Debts under $500 will not be shown on reports.
Paid medical debts will not appear.
Unpaid medical debts will not appear for at least one year, giving the payer time to fix possible billing errors or negotiate their bill.
This is great news for many Americans; as a group, we have an estimated medical debt of $195 billion.
What Medical Debt Isn’t Affected?
You’ve probably noticed that not all healthcare debt is being removed from your credit report; debts of over $500 that are at least 1 year old will still be shown — and may still affect your credit rating. Experts recommend that those with significant medical debt take advantage of the grace period to set up a payment plan or work to clear the debt if possible.
How Healthcare Debt Affects Your Mortgage
Like other forms of debt, medical debt impacts how much you can afford to spend on your monthly mortgage payments. A heavy debt burden raises your debt-to-income ratio, which can impact your mortgage interest rate and what type of mortgage you qualify for.
Mortgage lenders often advise clients to pay off or reduce any outstanding debts so they can get a better deal on their loan. With these medical debt reporting changes, it may become easier for families and individuals who have coped with medical debt to afford a new home. If you’re in this situation, talk with your local Mortgage 1-Jackson Loan Expert today; they can help you get a realistic view of your financial situation and your options. Reach out to us at 517-315-4626 or www.mortgage1jackson.com