Medical debt is a serious problem that affects people’s ability to get a mortgage. Learn more about efforts by the White House and others to help.
Health care costs make up a significant part of people’s outstanding debt in the U.S. Even those with health insurance may struggle with medical bills because of an accident, serious illness, or other unexpected events. As these debts pile up, they affect people’s credit reports and credit scores. This affects their ability to obtain credit, including mortgage loans to buy homes.
Both the federal government and the three major credit reporting agencies (CRAs) have recently taken action to reduce the impact of medical debt on creditworthiness with regard to mortgages. In April 2022, the White House announced a series of actions intended to address medical debt. The plan includes improvements to government underwriting programs run by the Federal Housing Administration (FHA) and other agencies.
What is medical debt?
Medical debt consists of debt related to healthcare, including doctor bills, hospital bills, prescription medications, and other expenses. Healthcare finance is a particularly controversial issue in the U.S., but the reality of medical debt is difficult to deny.
People may incur unexpected medical costs because of injuries, such as automobile accidents, workplace accidents, crime, or other incidents. They may also incur expenses because of unexpected illnesses that require extensive medical attention, such as COVID-19 or cancer. Health insurance may cover part of the expense, but often only after the insured has met their deductible.
Recent estimates place the total amount of outstanding medical debt in this country somewhere around $140 billion. Half of the U.S. population carries medical debt, with amounts ranging from a few hundred dollars to many thousands of dollars.
The impact of all of this debt is widespread. A study published in 2000 found that medical bills were a substantial factor in 40% of new personal bankruptcy filings. A study published almost 20 years later found that this had increased to nearly two-thirds of all bankruptcies.
How can medical debt affect someone’s eligibility for a mortgage?
If medical debt is such a significant factor in bankruptcy, it’s not hard to imagine how it can affect eligibility for mortgages or other credit. A study conducted in 2019 found that 38% of prospective homebuyers with outstanding medical debt were turned down for mortgages. That rejection rate was substantially higher than for homebuyers whose biggest issue was student loan or credit card debt.
The underwriting process is supposed to identify potential risks for lenders. If a loan applicant has a large amount of unpaid debt or a history of not paying their debts, an underwriter might conclude that they are not a good risk. Not all debts are the same, though. Medical debt, in particular, might not be a good predictor of a person’s creditworthiness.
How is medical debt different from other debt?
We tend to think of debt in terms of choices and responsibility. Please keep in mind that this is all a huge oversimplification. A person with a lot of student loan debt made the decision to go to school. A person with massive credit card debt chose to make those purchases — or at least we tend to assume that the purchases were not entirely necessary. Medical debt is rarely a matter of choice to the same extent as other kinds of debt. A person with a large amount of medical debt does not necessarily present the same kind of risk as someone with an enormous credit card bill. In many cases, the debt resulted from a single, acute medical incident.
The legal system is starting to recognize how medical debt is different. So are underwriters and CRAs. in late 2020, Congress enacted a law intended to crack down on unexpected medical bills. The No Surprises Act, which took effect on January 1, 2022, prohibits a variety of medical billing practices, such as undisclosed out-of-network provider charges.
The three main CRAs, Equifax, Experian, and TransUnion, announced in March 2022 that they were changing the way they handle medical debt information:
Starting July 1, the CRAs will no longer include paid medical debt in people’s credit reports.
The CRAs currently wait six months after receiving medical debt information before adding it to a report. They will extend this waiting period to one year in order to give people more time to pay.
In 2023, the CRAs will no longer report any medical debts of less than $500.
The White House’s plan builds on these reforms.
What’s in the new White House plan?
The White House plan includes a wide range of actions. Several of them apply specifically to mortgages:
For loans issued through the U.S. Department of Agriculture (USDA), underwriters will no longer consider “recurring medical debts” when evaluating loan applications.
Department of Veterans Affairs (VA) loans will give little weight to medical debt when assessing creditworthiness, and will almost entirely disregard veterans’ medical debt from VA Care.
Underwriting for FHA loans will no longer consider medical debt at all.
The Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac, is reviewing how those entities use medical debt in their underwriting guidelines for conventional mortgage loans in order “to ensure that measures of creditworthiness are accurate, reliable, and predictive.”
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