FHA loan guidelines are different from any other program, which is why this program is known as one of the most flexible programs available. When it comes to medical collection accounts, there are certain circumstances when a person can get approved for an FHA loan without ever touching the collections. The determination is made on a case-by-case basis.
Understanding FHA Loans
The first thing to understand about FHA loans is that they are not funded by the FHA. Each lender that approves the FHA loan is the one that provides the funds. This means that what one lender will approve, another might not and vice versa. The FHA’s stance on medical collections is that it depends on the exact circumstances of the situation. Each lender is supposed to look at collections and determine:
- If the borrower intentionally did not pay the debt
- If the borrower is not able to properly manage his finances
- If there were extenuating circumstances that caused the medical collection
As you can probably assume, the first two scenarios would mean that you probably would not get approved for an FHA loan. The third scenario, however, with the right proof can land you an FHA loan.
Extenuating circumstances usually mean something happened that was outside of your control. For example, you got severely injured in an accident and were unable to work for a long period of time. In this case, you would be able to show the decrease in your income, even if you received disability for part of the time, and why it was so hard to afford your bills, including your medical bills. You could also show what your insurance did not pay and that furthered your financial difficulty.
Proving the Reason for the Medical Collection Accounts
The lender is obliged to collect ample information regarding your medical collection accounts if they are planning on approving you for an FHA loan. This means that you have to not only prove the decrease in your income but also that it was a one-time occurrence. You have to show the lender that you have been able to make up for the decrease in your income and that everything is back to normal. You can do this by showing your increased income as well as a steady credit report that has timely payments and credit that is not over-extended.
The bottom line is that each lender might have a different answer for you regarding your medical collection accounts. They are most definitely not a surefire reason to turn down your application for an FHA loan according to the FHA. However, each lender has their own requirements and their own thresholds when it comes to determining what types of risks they want to take.
Prove your Story
If you find that one lender turns you down for an FHA loan because of your medical collection accounts, consider applying with a different lender. You should always have ample proof of the reason for the collection that shows a story that is different than you just did not want to pay the bill. You have to be able to prove every aspect of your story with ample documentation, so make sure that you have all of the proof ready in order to get yourself approved for the FHA loan if you meet all of the other FHA requirements.
FHA loans are among the most flexible loan programs available today which is why medical collection accounts are not always a reason to decline an applicant. If you have perpetual medical collections that you have a pattern of not paying, that could be grounds for a denial. On the other hand, if you just have a few collections from one time period and it can be proven that you were forced to let these accounts go unpaid, you can benefit from the FHA program.
It is encouraged to shop around with a variety of different lenders to see what each one has to say about your medical collections. You will not likely get the same answer from two lenders, so knowing what your options are in terms of getting approved as well as the cost/interest rates for the loan is well worth the effort in shopping around.