Your credit score and delinquent medical debt

Obtaining a mortgage is effected by your credit score and delinquent medical debt

My friend Marcia Stolle with Paramount Mortgage just sent me this informative update on credit score revisions with regard to your credit score and delinquent medical debt. The good news is that the main credit scoring company, FICO, is giving less weight to delinquent medical debt. The bad news is that your mortgage lender may not use this new score immediately.

But, here’s the important part of this story for those of you in this situation – knowledge is power. When you are checking for a lender, you should now ask them if they are aware of this new scoring method and if they have a product that could work for you in light of this information. Not all lenders use the same technique. Click here for a news release from the National Association of Realtors regarding the change.

New FICO Revision

The nation’s main credit scoring company, FICO, has its latest revision due for release this fall – giving less weight to delinquent medical debt. As it stands now, if you have an accident and are facing large medical bills, your credit could be wrecked.

Obviously accidents aren’t planned, and you may not be able to pay those medical bills on time and they’ll end up with collection agencies. To the computers that make most credit decisions, your moment of bad luck makes you look like a deadbeat. You’ll be sentenced to seven years of credit purgatory – banned from the better deals on mortgages, auto loans and credit cards.
The good news here is that FICO no longer thinks that’s proper, and FICO carries some clout. Someone whose only black mark is medical debt would see their scores rise 25 points, FICO says. The system has a gift for other troubled consumers too: It ignores all debt that went to a collection agency but was later paid in full. No longer would it curse your credit for seven years.
Debtors, however, should not break into cheers. Lenders will be very slow to adopt the new FICO model, and some probably never will. Fannie Mae and Freddie Mac, which dictate the rules for conventional mortgages, still haven’t adopted FICO revisions made in 2009. Many other lenders haven’t either. According to Gerri Detweiler, director of consumer education at Credit.com and an author of books on consumer credit, “It will have no effect in the very short term. Over time, hopefully, it will offer change for consumers.”

That’s unfortunate, because a single collection account can destroy a credit score. The federal Consumer Financial Protection Bureau says a credit score of 780 would drop to 665 with one debt referred to collectors. That would turn a borrower with sterling credit into an outcast who would have a hard time landing a decent conventional mortgage.

Why the delay on adopting these changes? Partly it’s caution. FICO just sent its new formula to the three big credit agencies – TransUnion, Equifax and Experian. They’ll check it against their own data to see if it better predicts defaults. Then they’ll pass it on to their lender clients, who may or may not adopt it. Many have their own tweaks on FICO scoring systems, and they’ll want proof that the new method is better than what they’re using.

This article was from Marcy Stolle: Marcy Stolle understands the needs of home buyers. Her compassion helps place first-time buyers at ease, while her 28 years of experience in the mortgage industry proves she has what it takes to provide a smooth transaction for all of her clients Since she is well versed in all types of mortgages, from conventional and jumbo loans to government loans, Marcy knows how to find the right type of mortgage to best fit the needs of her buyers.