Will debt relief hurt my chances of buying a house?
Debt settlement could saddle you with more financial problems, like lower credit scores and a bill from the IRS, both of which could make it harder to qualify for a mortgage. Ultimately you can still get a mortgage after debt settlement, but you have to approach the process with some strategy and caution.
Once your debts are settled, you might need a few years to recover and become eligible for a conventional (meaning not government backed) mortgage. On the other hand, paying off an old collection debt might not delay your timeline to buy a home at all, and can even make you more attractive to some lenders.
Generally speaking, having a debt consolidation loan will not have a negative impact on your ability to refinance your home or obtain a new mortgage. In fact, it may actually improve your ability to qualify. One thing that a lender will assess during the mortgage or refinancing review is your debt-to-income ratio.
Cons of debt settlement
Creditors are not legally required to settle for less than you owe. Stopping payments on your bills (as most debt relief companies suggest) will damage your credit score. Debt settlement companies can charge fees. If over $600 is settled, the IRS will view this debt as a taxable income.
However, most experts recommend waiting at least 2 years after finishing debt settlement before applying for a mortgage. Waiting gives you time to: Improve your credit – Negative marks from debt settlement stay on your credit reports for 7 years. But their impact lessens with time.
This means your total monthly debts, including your prospective mortgage and any other debts like car payments or credit card bills, shouldn't exceed 43% of your monthly income.
- Debt Settlement Fees. Many debt settlement providers charge high fees, sometimes $500-$3,000, or more. ...
- Debt Settlement Impact on Credit Score. ...
- Holding Funds. ...
- Debt Settlement Tax Implications. ...
- Creditors Could Refuse to Negotiate Your Debt. ...
- You May End Up with More Debt Than You Started.
There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.
If you have a substantial amount of high-interest debt, consider paying it down before saving for a house. Any interest – but especially high-interest debt – can significantly extend your debt repayment timeline and eat away at the money you could be saving for a home.
Should you pay off all credit card debt before getting a mortgage? In some cases, especially if your current credit score makes it difficult for you to get a mortgage loan, it's a good idea to pay down credit card debt. But keep in mind that credit card debt isn't the only factor in getting mortgage approval.
Is it worth doing a debt relief program?
Debt relief will also often give you a fixed payment plan and a set payoff date, which can also make it worth considering — as streamlining your payments can make it easier to manage while helping you save money on interest. "One of the biggest advantages of going through a debt relief program is the savings.
Despite the potential downside, settling a debt by making partial repayment is better for your credit (and peace of mind) than neglecting it and leaving it unpaid. If you ignore a debt, the creditor will typically turn it over to a collection department or third-party collection agency.
However, this does not influence our evaluations. Debt relief won't hurt your credit alone. However, closing your oldest accounts can drastically lower your standing.
If you want to buy a home while on a debt management plan, you should talk with your credit counselor. Since some debt management plans raise red flags for lenders, the homebuyer might not qualify for a prime interest rate. Higher interest can add substantially to the monthly payment.
Debt consolidation itself doesn't show up on your credit reports, but any new loans or credit card accounts you open to consolidate your debt will. Most accounts will show up for 10 years after you close them, and any missed payments will show up for seven years from the date you missed the payment.
In most cases, it makes sense to pay off credit card debt before buying a home. Paying off credit card debt can increase your credit score and decrease your debt-to-income ratio, both of which may qualify you for lower mortgage rates.
Different lenders will have different thresholds of what counts as an acceptable debt to income ratio. But generally the lower the number the better your chances. For credit card debt, most mortgage lenders will assume you're paying back between 3% and 5% of the debt each month.
As a general guideline, 43% is the highest DTI ratio a borrower can have and still get qualified for a mortgage. Ideally, lenders prefer a debt-to-income ratio lower than 36%, with no more than 28%-35% of that debt going towards servicing a mortgage. 1 The maximum DTI ratio varies from lender to lender.
Most lenders say a DTI of 36% is acceptable, but they want to lend you money, so they're willing to cut some slack. Many financial advisors say a DTI higher than 35% means you have too much debt.
At first glance, debt settlement may appear like an excellent solution. In reality, debt relief is a valid tool for some — but for most, it should be a last-resort option. Here's what to consider before settling your debt.
What is the best debt relief program?
| Debt Relief Companies | Best for |
|---|---|
| Featured partner National Debt Relief | Best for credit card debt |
| Money Management International | Best overall |
| Accredited Debt Relief | Best for customized options |
| Americor Debt Relief | Best for all unsecured debt types |
If a credit card account remains open after you've paid it off through debt consolidation, you can still use it. However, running up another balance could make it difficult to pay off your debt consolidation account.
Yes, auto loan lenders don't exclude those who have gone through bankruptcy. However, you'll pay higher interest rates if you finance the vehicle after receiving a bankruptcy discharge.
Consider your bigger financial values
Financial experts agree that you should generally invest your extra cash rather than accelerate paying off low-interest debt, but still some people place immeasurable value on being debt-free or owning a debt-free home.
- Search for Low-Income Homebuying Programs. ...
- Determine Eligibility. ...
- Look for Down Payment Assistance. ...
- Gather Required Documents. ...
- Apply for a Mortgage. ...
- Find a Local Real Estate Agent in California. ...
- Search for an Affordable Home. ...
- Secure a Home Inspection and Appraisal.
