Can you have medical collections and still qualify for a USDA loan?
Medical collections can really put a strain on your loan approval with many government sponsored loan programs, but with the Section 502 Guaranteed USDA loan it is not an issue as long as it meets certain criteria.
It is important to note that whether it is a medical or non-medical collection, these types of credit account are still considered negative and impacts credit scores overall.
Currently the USDA instructs approved lenders to following these guidelines below during the underwriting process:
1. Determine if the total outstanding balance of all collections accounts is equal to or greater than $2,000.
2. Remove all medical collections and all types of charge-off accounts from the total balance.
Medical collections and charge-off accounts must be clearly identifiable on the credit report.
3. If the remaining outstanding balance of collection accounts are equal to or greater than $2,000, any of the following actions will apply:
1. Payment in full of all collection accounts at or prior to closing.
2. Payment arrangements are made with each creditor for each collection account remaining outstanding.
This must be documented by either a letter from the creditor or evidence on the credit report which validate the payment arrangements.
The agreed upon monthly payment for each outstanding collection account will be included in the borrower’s debt-to-income ratio.
3.In the absence of a payment arrangement, the lender will utilize in the debt-to-income ratio a calculated monthly payment.
USDA Loans with Medical Collections Continued
For each collection utilize 5% of the outstanding balance to represent the monthly payment.
Many homebuyers believe that paying off a collection or charged off account is the answer to fixing their credit or getting approved for a home loan, but that is simply not the case.
In many instances, paying off the derogatory account does not immediately impact the borrower’s credit positively; in fact it can actually lower the scores.
This is due to reactivating an old derogatory account that is not impacting the credit as much as one thinks. Also by making a payment to these types of accounts the borrower is depleting liquid assets that instead could be utilized for cash reserves after closing or for loan approval.
As a reminder, it is important to note that each applicant’s situation will be looked at closely to determine if the reasons for the open collections are one time occurrences that are not likely to recur or if they represent a trend of unwillingness or inability to repay debts.
In summary, the USDA guidelines on medical collections provide clarity and even more flexibility for borrowers when applying for a USDA Rural Housing loan with medical collection accounts.
