Does debt type matter?

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  • Peter Miller

Ask Our Broker With Peter G. Miller

By Peter G. Miller
CTW Features

Question: My wife has been successfully treated for breast cancer but the financial side effects have included a substantial amount of debt, several maxed-out credit cards and a lower credit score. Will mortgage lenders give us a break because our debts are from medical issues and not irresponsible spending?

Answer: Many households have substantial medical debt. According to the 2016 Kaiser Family Foundation/New York Times Medical Bills Survey about a quarter (26 percent) of U.S. adults ages 18-64 say they or someone in their household had problems paying or an inability to pay medical bills in the past 12 months.

Even with insurance, it’s possible to have substantial levels of medical debt, debt that will raise several issues for mortgage lenders.

First, because there is more debt relative to the amount of credit you have available, those maxed-out credit cards, you will have lower credit scores. However, the bigger question is whether you have been able to handle the additional debt. For instance, if you have a long-term history of good credit and now have late payments or missed payments, that would greatly concern lenders.

Second, credit scores increasingly reflect the reality that medical billing may not reflect good-faith efforts to deal with such costs. A patient may think a bill will be covered by an insurance company and then later discover the charge was never paid. According to Fair Isaac, a credit score pioneer, its latest formula differentiates unpaid medical accounts in collections from unpaid non-medical accounts in collections. FICO’s research found that unpaid medical accounts were less indicative of credit risk than unpaid non-medical accounts. In fact, building the most predictive credit score requires treating medical collections this way.

Third, to the extent you paid off hospital bills with credit cards, you no longer have medical costs. According to Steve Weber, FICO’s treasurer and vice president for investor relations, credit bureaus track types of debt (mortgage, credit card, medical, etc.), but they don’t have access to what the underlying credit card charges were for. From a privacy standpoint, nobody would be comfortable with credit decisions being made based on what types of purchases you make on credit cards, that’s not changing.

Fourth, loan programs typically have debt-to-income (DTI) limits; that is, only so much of your monthly income can be used to pay recurring costs such as housing expenses, auto loans, student debt and credit card costs. It’s possible that your credit standing is perfectly fine while at the same time your DTI is too high.

The solution to the DTI problem, not a quick or easy solution, unfortunately, is to pay down debts as soon as possible.

For details and specifics, speak with local mortgage loan officers. Ask about the financing for which you now qualify, which debts you should repay first and the types of loans which might be available to you as debt levels are reduced.

© CTW Features

Peter G. Miller is author of “The Common-Sense Mortgage,” (Kindle 2016). Have a question? Please write to peter@ctwfeatures.com.

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