Millions of Americans struggle to keep up with medical bills, and as healthcare costs continue to climb, it's all too easy to fall behind. In fact, healthcare is now the number one source of personal bankruptcy filings in the U.S., with a whopping 66.5% tied to medical bills or health issues forcing unpaid time off from work.
But medical debt isn't just driving up Americans' personal debt loads -- it's also making it harder for people to qualify for mortgages. Zillow reports that 38% of would-be homebuyers were denied a mortgage because of medical debt. By contrast, 28% of Americans say their mortgage applications were rejected because of their outstanding student loans, and 22% cite credit card debt as the reason they were denied.
Debt and denial go hand in hand
There are several factors that determine whether you'll be approved for a mortgage. One is your credit score, which speaks to how responsible a borrower you are. Unfortunately, delinquent medical bills can be a black mark on your credit history, making it harder to qualify for a home loan. Similarly, if your medical debt drove you to file for bankruptcy, that filing will stay on your credit history for seven years in the case of a Chapter 13 (personal reorganization), or 10 years for a Chapter 7 (personal liquidation).
Furthermore, mortgage lenders look at your debt-to-income ratio when determining whether you're a quality loan candidate. Ideally, that ratio should be at or below 36% if you want a shot at getting approved. But if a large chunk of your monthly income is eaten up by medical debt payments or bills, that ratio can climb, thereby killing your chances of getting to buy a home.
And let's not forget the fact that folks with medical debt tend to have cash flow problems -- another impediment to buying a home. In fact, Zillow reports that nearly 66% of renters and 44% of homeowners with medical debt don't have enough money to cover an unplanned $1,000 expense. Frankly, anyone in that situation shouldn't be buying a home, since an unanticipated repair can well exceed that threshold.
Medical debt and mortgages don't mix
If you've been denied a mortgage due to medical debt, it may be a tough pill to swallow (pun intended). But consider this: If your finances aren't in great shape because of that debt, then the lenders who said no probably did you a favor. Holding off on buying a home is a much preferable scenario to purchasing property and losing it later to foreclosure. As such, it pays to dig yourself out of that debt, save some money, and then attempt to get a mortgage. The stronger a position you're in financially when you apply, the greater your chances of not only getting approved, but also securing a favorable rate on your home loan that will make your newest pile of debt more affordable.
Of course, digging out of medical debt is easier said than done, but you can try negotiating with the providers you owe money to in order to lower some of your balances. Another option? Seek out the help of a health advocate whose job is to negotiate medical bills on patients' behalf. Your employer might offer a health advocate program, so it's worth seeing if that's an option. Ultimately, though, you may need to give yourself time to slowly but surely work your way out of debt before taking on a home loan.
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