Working with a credit counseling agency is sometimes the last resort for consumers who cannot handle their own personal finances. Using the knowledge of credit counselors allows borrowers to create a budget and begin making repayments on their outstanding debt. You might think that you would not be able to get a mortgage application approved during this time, this is not necessarily so.
Credit counseling can help you to get your finances in order, reduce your debt balances, and begin rebuilding your credit score. Counselors do not report your counseling status to credit bureaus, so this shouldn't affect a mortgage application. Starting a debt management plan (DMP), however, can have a negative effect on your credit score. A DMP can be useful to get you lower interest rates and reduced payments, but it is reported to the credit bureaus and may impact your credit score.
While this may worry some, using a DMP doesn't automatically exclude people from buying a home. Neither the Freddie Mac nor Fannie Mae underwriting guidelines for conforming loans mention DMPs at all. Mortgage lenders will judge your application on many factors, including your debt-to-income ratio, payment history, and credit score. If these are acceptable and they believe that you are financially stable, they may grant you a mortgage.
If you turn to credit counseling and DMPs as a way to work yourself out of debt, you shouldn't write off the dream of owning a home. In the right circumstances, if you are rebuilding your credit and are able to prove to lenders that you can be trusted to pay off a loan, you can also start to think about buying your own home.
If you want to settle outstanding debts for less than what you owe, try our debt settlement tool.
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