Can you qualify for a USDA loan with medical collections?

How do you qualify for a USDA loan with medical collections on your credit?

Does it make a difference what type of collection account it is?

Today’s video will go into detail about the USDA qualifying process and how it is possible to qualify for a USDA loan with medical collections on your credit.

Now, if you have not yet done so, don’t forget to take advantage of the “Metroplex” second opinion service which is a great feature that allows us to review both existing transactions or pre-qualifications and help maximize the financing to see if a USDA loan could be right for you!

(800) 806-9836 Ext. 280
SeanS@MPLX.org

Can you qualify for a USDA loan with medical collections?

Don’t let medical collections bring your loan qualifying to a screeching halt!

As a starting point, whether it is a medical or non-medical collection, this type of activity is considered negative and impacts credit scores. With that being said, USDA guidelines have been improved for situations involving medical collections.

Current USDA guidelines now instruct the lender to consider the following 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.
      • For each collection utilize 5% of the outstanding balance to represent the monthly payment.

Simply paying a collection account does not immediately justify intent for good credit, and requiring a payment may cause the depletion of liquid assets that instead could be utilized for reserves after closing.

Remember that each potential applicant’s qualifying will be looked at differently which will determine the reasons for any open collections and if they are considered 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 new USDA guidelines provide clarification and additional flexibility when attempting to qualify for a USDA Rural Housing loan with medical collection accounts.