We get asked this question almost every day “Can you get a mortgage if you’ve done credit counseling and are on a Debt Management Program (DMP)?” The short and sweet answer is “YES”! There are a few things that you need to consider though. Consumer credit counseling can get individuals with poor credit scores on the road to home ownership, but it doesn’t happen overnight. We’ll discuss that in further detail later on in this blog post. But first, let’s explore the relationship between Mortgages and Credit Counseling.
Mortgages and credit counseling –
Whether you have a good credit score or a bad credit score, whether you are a candidate for credit counseling or not, it’s important to realize that current interest rates are higher than they were at the height of the real estate bubble. This is because banks want to protect themselves from incurring financial loss above and beyond that which they suffered after the housing bubble burst. As it is, many houses – especially those in formerly hot “bubble markets” like Florida, California, and Arizona – sit unsold, and the values of those houses continue to fall.
Banks are toughening their standards for who can apply for a mortgage loan. A borrower with a good credit score is attractive to a money-lending institution. The high credit score demonstrates to a bank or other lending institution that the borrower is a low-risk individual – in other words, he or she is far less likely to miss a payment or to stop making mortgage payments altogether. Lending institutions reward these individuals by charging them much lower interest rates on loans.
Conversely, individuals with poor credit scores are considered to be risky borrowers, according to Bankrate.com. The chances that they will default on their loans are much higher. Lending institutions are much more likely to charge higher interest rates to individuals with poor credit scores to – again – insulate themselves from the shocks of financial loss stemming from loan defaults. Those higher interest rates can translate to hundreds of additional dollars in mortgage payments each month.
Saving money, in the long run, is a strong reason to clean up your credit score BEFORE you apply for a mortgage. If your credit score and payment history are in their wheelhouse, and your debt-to-income ratio is acceptable, most mortgage lenders don’t care if you’re in a DMP or not.
Neither Fannie Mae nor Freddie Mac’s underwriting guidelines specifically mention consumer credit counseling or enrollment in a Debt Management Program for conforming loans. FHA mortgage guidelines do mention consumer credit counseling payment plans, and it’s okay to be in one and get a home loan if:
- You are at least 12 months into the plan
- You’ve made all required payments in full and on time
- You have written permission from the counseling agency
Housing counseling helps you prepare –
If you are considering home ownership, the first thing you should do is work to clean up your credit score. And, credit counseling or online credit counseling is a great choice for a prospective homeowner with a shaky credit score. By divulging your financial situation and typical spending habits to one of our Advantage CCS credit counselors, you will be able to take the most important initial steps towards repairing your credit score. The process won’t happen overnight, but through dedicated work and resolve, you will be able to raise your credit score.
There are no fast fixes for improving your financial standing, unfortunately. You can, however, take some steps – with the assistance of a credit counselor – to see where your credit score stands and exactly what you’ll need to do to repair it.
Bankrate.com states that you will need to ask for a copy of your credit report and go over it carefully to ensure that there are no errors. False delinquencies, lines of credit you don’t actually have open, and even other peoples’ credit information in your report, are conditions that can contribute to false scores. You can get all 3 of your credit reports once a year by visiting www.annualcreditreport.com and downloading them for free! It’s a Federal Law that you’re allowed to receive your credit reports to review at least once per year.
Next, you should start paying down your debts. If they’re all on credit cards, pay off the cards with the highest balances first – usually those accounts that are at or near the credit limits. What’s the rationale behind this advice? Craig Watts works for Fair Isaac Corporation, the namesake of the FICO score (another name for “credit score”). He says that using most or all of the credit loaned to you can have negative effects on your credit score. However, having a big line of credit open with no outstanding balances – only bills that are paid off faithfully every time – makes you look like a better mortgage risk. It proves to mortgage lenders that you can borrow money and pay on time, every time.
What is credit counseling –
Credit counseling can act as just the thing to bring you from renting an apartment to having your very own mortgage. Simply find a reputable non-profit credit counseling agency and they can help you resolve your credit issues. Once your debt gets paid off and your credit score increases, you can start the process of buying a home.
After you meet with your credit counselor, the two of you will come up with a payment plan that should satisfy all of your debts. At the end of the credit counseling process, your credit will get cleaned up and your credit score will allow you to get a mortgage from a traditional lender.
Can I work with a credit counseling agency –
Before you meet your counselor, gather your credit card statements, bank statements, and other financial records. Your credit counselor will need these documents to create your debt repayment plan to help you get out of debt and raise your chances of homeownership.
You will also need to decide once and for all that you’re serious about eliminating your debt. The best debt repayment plan won’t work if you’re still using credit cards to finance extravagant purchases or eating out at restaurants three times a week.
Yes, housing counseling can help you buy a home. But you should know that not all housing counseling agencies are made equal. Before you sign up with an agency, research them on the Better Business Bureau website. You should also stay away from any company that asks you to pay for their services. The only fee that you might have to pay when working with these non-profit companies are those related to what is known as a debt management plan. Not all people who work with a credit counseling company will need a debt management plan, so you will probably get to work with a counselor for free if you don’t have much debt.
When will I be able to buy a home –
When you work with a housing counseling agency, you will need to know that patience is key. Paying off debt is a marathon, not a sprint. If you have a low credit score, it probably happened because of financial behaviors you implemented over the years. It will take time to extricate yourself from your former way of spending. But if you follow the agency’s repayment plan faithfully, you will see positive results. Before you know it, you’ll move into your brand new home.
Many aspiring homeowners have used credit counseling agencies to make their dreams of home ownership come true. You will learn how to handle and pay off debts – and more importantly, you will learn tricks for avoiding future debts. If you want to buy a house – but your credit is less than perfect – give Advantage CCS a call today! We want to help you get on the path to the American Dream of homeownership. Call us toll-free at 1-866-699-2227 or visit us online at https://www.advantageccs.org to find out more information!