Medical Debt on Credit? Save Your Texas Mortgage Closing

A Last-Minute Surprise: The Medical Debt Problem

You're days away from closing on your dream home in Texas. You’ve submitted every document, your loan is in its final stages, and then your loan officer calls with bad news: a new collection account just appeared on your credit report. It’s a medical bill you either forgot about or never knew existed, and now your mortgage approval is at risk. This scenario is incredibly stressful, but it's often fixable.

Recent changes in how credit bureaus handle medical debt, combined with specific mortgage strategies, provide a clear path forward. This guide will walk you through the exact steps to address a surprise medical collection and keep your closing date on the calendar.

How Medical Collections Are Treated Differently

Fortunately, both credit bureaus and mortgage lenders view medical collections more leniently than other types of debt, like a credit card charge-off. Significant changes have been implemented to reduce the impact of medical debt on consumer credit reports.

Here’s what you need to know:

• Paid Medical Collections Are Deleted: As of 2022, once a medical collection is paid in full, it must be completely removed from your credit report. It doesn't just show as 'paid'; it vanishes, which can provide a significant and immediate boost to your score.
• One-Year Grace Period: New, unpaid medical collections will not appear on your credit report for a full year. This gives you 12 months to resolve the bill with the provider or your insurance company before it can affect your credit.
• Small Debts Are Ignored: As of 2023, medical collection accounts with a balance of less than $500 are no longer included on your credit reports at all. This is a game-changer. If your surprise collection is for $450, it shouldn't be on your report and can be disputed for immediate removal.

These rules mean that a medical collection is not the automatic deal-breaker it once was. Lenders understand that these debts are often unexpected and not an indicator of poor financial management.

Can My Texas Lender Legally Ignore a Medical Collection?

Yes, in many cases, your lender can and will ignore a medical collection, especially if it's small. Mortgage underwriting is not black and white; it involves a holistic review of your financial profile. An underwriter's primary goal is to assess your ability and willingness to repay the mortgage.

Lender Discretion and Overlays

Automated underwriting systems (AUS) like Fannie Mae's Desktop Underwriter (DU) and Freddie Mac's Loan Product Advisor (LPA) have specific rules for collections. Generally, the AUS analyzes the overall risk profile, and for conventional loans, it may issue an approval without requiring minor collection accounts to be paid off, especially if the borrower's profile is otherwise strong. (The data, information, or policy mentioned here may vary over time.)

Even if the system flags the new account, a human underwriter can often use their discretion. They will consider factors like:

• Your Overall Credit Profile: Do you have a history of on-time payments, a high credit score (aside from this one issue), and low credit card balances?
• The Size of the Debt: A $600 medical collection is viewed very differently from a $6,000 credit card charge-off.
• Your Debt-to-Income (DTI) Ratio: If your DTI is low, the lender has more confidence that you can handle your financial obligations, including the new mortgage payment.

For example, if you have a 740 credit score and a 38% DTI, and a $750 medical collection appears, the underwriter is very likely to approve the loan without requiring you to pay it off, as you've demonstrated strong financial habits elsewhere. (The data, information, or policy mentioned here may vary over time.)

The Fastest Way to Remove an Inaccurate Medical Debt

If you believe the medical debt is an error—perhaps it was an insurance mistake, a duplicate billing, or belongs to someone else—your first step is to file a dispute. Time is critical during the closing process, so you must act quickly.

Step 1: File a Dispute Online

Immediately go to the websites of all three major credit bureaus: Equifax, Experian, and TransUnion. Do not mail a letter, as the online process is much faster. File a dispute for the inaccurate medical collection with each bureau. Clearly state why you believe the debt is an error and upload any supporting documentation you have, such as an insurance Explanation of Benefits (EOB), a receipt, or a letter from the medical provider.

Step 2: Inform Your Loan Officer

Tell your loan officer you have filed a dispute. This is crucial because they need to communicate the situation to the underwriter. They also need to be prepared to take the next step if the dispute doesn't resolve in time.

What is a Rapid Rescore?

The standard dispute process can take up to 30 days, which is too long when your closing is next week. This is where a rapid rescore becomes your most powerful tool. A rapid rescore is a process available only through mortgage lenders that requests the credit bureaus to update your credit report in a matter of days, not weeks.

Here’s how it works:

1. Obtain Proof of Correction: You need written proof that the debt has been corrected or removed. This could be a deletion letter from the collection agency or a letter from the medical provider stating the bill was an error.
2. Submit to Your Lender: You provide this documentation to your loan officer.
3. Lender Initiates Rescore: Your lender submits the proof to their credit reporting agency, which in turn submits it to the credit bureaus with a request for an expedited update.
4. Report is Updated: Within 3-5 business days, your credit report is updated to reflect the removal of the collection account, and your credit score is recalculated. (The data, information, or policy mentioned here may vary over time.)

This process can save a loan that would otherwise be denied due to a sudden credit score drop from an erroneous collection.

Will Paying the Collection Before Closing Lower My Score?

This is a common and valid concern. Sometimes, paying an old collection account can cause a temporary dip in your credit score because it updates the 'date of last activity' on the negative item, making it appear more recent to the scoring algorithm. However, with new credit rules, this is less of an issue for medical debt.

Since paid medical collections are now completely deleted from your report, paying it off is the best path forward if the debt is valid. The key is to get proof of payment and use a rapid rescore.

Action Plan for a Valid Debt:

1. Contact the Collection Agency: Call them to arrange payment in full. Since credit bureaus are now required to remove paid medical collections, your primary goal is to get written proof of payment.
2. Make the Payment: Pay the agreed-upon amount and immediately get a receipt or a letter showing a zero balance. Get this promise via email before you send any money.
3. Initiate a Rapid Rescore: Give the proof of payment to your loan officer to start the rapid rescore process. The collection will be removed from your report, and your score will likely increase.

Crucial Advice: Never pay a collection during the mortgage process without first discussing it with your loan officer. They will provide the correct strategy to ensure it helps, rather than hurts, your loan approval.

FHA and VA Loan Rules for Medical Debt

If you have a government-backed loan like an FHA or VA loan, you're in an even better position. These loan programs have more lenient guidelines regarding medical collections.

• FHA Loans: The FHA handbook specifies that medical collections do not need to be paid off to qualify. Lenders exclude medical collections from the debt-to-income ratio calculation and from the cumulative $2,000 collection balance that can trigger additional underwriting requirements. While an underwriter still reviews the entire credit profile, these specific exclusions make it easier to get approved. (The data, information, or policy mentioned here may vary over time.)
• VA Loans: The VA gives lenders significant discretion. While there's no specific rule ignoring medical debt, VA guidelines are generally flexible. Lenders are encouraged to look at the 'big picture' of the veteran's finances. A single medical collection is highly unlikely to be the sole reason for a VA loan denial, especially if the veteran is otherwise well-qualified.

What to Do If the Collection Agency Won't Cooperate

Sometimes, a collection agency may be difficult to work with. They might refuse to provide a 'pay for delete' letter or fail to send you proof of payment in a timely manner.

If you find yourself in this situation, you have recourse:

1. Send a Debt Validation Letter: Send a formal letter via certified mail requesting that they validate the debt. This forces them to provide proof that you owe the money and that they have the legal right to collect it.
2. Reference the FDCPA: The Fair Debt Collection Practices Act (FDCPA) outlines your rights. Inform them you know your rights and that you expect them to comply with the law.
3. File a CFPB Complaint: If they still refuse to cooperate, file a complaint against the agency with the Consumer Financial Protection Bureau (CFPB). The CFPB will investigate on your behalf, and collection agencies are often motivated to resolve complaints quickly to avoid regulatory scrutiny.

Facing a last-minute medical collection is alarming, but it’s a manageable problem. By understanding the new rules and working closely with a knowledgeable loan officer, you can navigate the issue and proceed to a successful closing.

A surprise medical debt doesn't have to derail your dream of homeownership in Texas. If you're facing a last-minute credit issue, a skilled mortgage strategist can make all the difference. Apply now to review your options and get a clear plan to secure your new home and keep your closing date.

Author Bio

David Ghazaryan is the expert mortgage strategist and founder behind iQRATE Mortgages. With a mission to fund home loans that traditional banks won't touch, David specializes in helping clients with unique financial situations, including those recovering from foreclosure or bankruptcy. He expertly crafts smart, strategic, and stress-free mortgages by leveraging a vast network of over 100 lenders to secure competitive rates for investors and homebuyers alike. Praised for exceptional customer service, David has helped hundreds of families with a 97% satisfaction rate, guiding them to the mortgage they deserve.

References

CFPB - Medical Debt on Credit Reports

HUD Handbook 4000.1 - FHA Loan Requirements