The majority of collections I see on credit reports stem from medical debts. The collection industry has published reports showing medical collections account for roughly 40% of all collections. The problem with debts related to medical services is that the billing is sometimes lackluster, making some of the collections inaccurate, and thereby decreasing credit scores in error. One of my clients applied for a mortgage to finance the purchase of a vacation home, she told me that her credit was good, her score was typically in the high 700 range around 780, but sometimes reached 800.
When I pulled her credit I discovered she had a 705 FICO score, which is not a bad score at all, but cream of the crop is 740 and up. If someone has a 740 FICO score they will always get the best interest rate as it pertains to credit. A 705 may or may not get the best available rate, it varies by the specifics of the scenario.
She had a 705 for one reason, there was a collection on her credit report for $381 from a medical provider. I gave her a copy of her credit report and told her about the collection, she was furious because she said it should not be on her report. Where do we go from here?
First off, the collection is not going to prevent her from getting approved for the mortgage, so we are safe there. However, will she get the best terms possible? The answer would be no if the best terms for her scenario require a 740, but even then, the terms for a 705 FICO score will still be good, just not necessarily the best. Imagine it this way, I have two pizzas, one came from the freezer aisle at the grocery store, the other was made fresh at a low-end pizzeria. I am going to say they are both good because they are pizza, but I will say the fresh made pizzeria pizza (740 FICO) is better than frozen pizza (705 FICO). It could be worse, it could be school cafeteria pizza, which I am going to compare to a 660 FICO, still pizza, just not great pizza. A FICO score under 620 is just a dry cracker with tomato paste on it, not even close to being pizza.
Now that I have you hungry for pizza, let's move on. She is mad and confused, why would this be on her credit report?
She had only experienced a single medical issue recently, an injury on the job that sent her to the hospital. Keep in mind that collections can come from years ago and appear out of the blue, I have another story for that at another time. She called her employer to inquire about whether the bill had been paid, and confirmed that it had. Next she contacted the medical facility that had placed her account in collection to see why they had sent a paid account to collection. They acknowledged that the account had been paid, and that it should not have been sent to collection, and they promised to remove the collection within 30 days from the three credit bureaus.
In the meantime she is trying to close on a vacation home in less than 30 days, and her FICO score is at least 75 points lower as a result of the error made by the hospital. My recommendation to avoid this issue is to apply for a mortgage early to make sure there are no issues on the credit report, and if there are, there is still time to address it and fix it. Early meaning that if you know you are going to be in the market for a home in the next 90 days apply now or earlier to guard against issues, always check your credit report at the minimum once a year, and always follow up with medical providers to get a final billing reflecting your account paid in full to be certain there is nothing leftover unpaid by insurance. NEVER ASSUME ANYTHING WHEN IT COMES TO MEDICAL BILLS, I see these things bite people every week, it is unfortunately common, be aware.
In the end there was no time to get the collection removed before she needed to close. There is the possibility of a rapid rescore when there is an error, which could correct the report internally within 48 - 72 hours, but the collection agency would not provide the letter required for a rapid rescore. Ultimately her interest rate was slightly higher (1/8), the result being an increase to her payment by $14.05 per month. $168.60 each year more because of the collection, $5,058.00 over the term of her 30 year mortgage. It adds up, but despite the monetary cost, the bigger issue is we have a person who has always done the right thing, paid her bills on time, never abused credit, but when her credit counted it wasn't at its best.
The moral of the story, you can have perfect credit at this moment, but will you watch your credit to make sure it is perfect when it counts? Will you apply for a mortgage in advance to make sure there is time to rectify any surprise issues, such as errors knocking down your FICO score? The biggest question is, will you use a loan officer who cares enough to help you address mistakes when there is enough time?
Have a mortgage or credit question you would like for me to cover on this blog? Shoot me an email so I can address it. If you want to apply for a mortgage in Arizona give me a call at 480-203-4641, the application process is easy, and it only takes 10 minutes for me to get the information to get you started on your way to home ownership.
Patrick Ritchie
Mortgage Finance Instructor
Mortgage Finance Instructor
Ritchie School of Real Estate Finance
480-203-4641 Cell
Patrick@PatrickRitchie.com
Patrick@PatrickRitchie.com
NMLS# 276438 AZ#0913109
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