Buying A House After Debt Settlement: What You Need to Know
Posted on June 17, 2021 in Debt
Can you buy a house after debt settlement? The short answer is ‘yes’. Should you buy a house after debt settlement? The short answer there is: ‘It depends’. If you’ve done the groundwork and are on the road to real financial stability, it’s okay to consider a better life and look forward to the next step. That means you should be done with the debt settlement and well on your way to rebuilding your credit. It’s probably been a difficult road, and like any time after you’ve done hard work, you want to reward yourself. If that means checking out home ownership after getting debt relief, there’s nothing wrong with going that route. There are a few important considerations to keep in mind, however. Remember that after a rough financial struggle, you need to tread carefully and prepare diligently for what comes next.
What Is Debt Settlement and What Happens After you Settle?
Debt settlement involves paying a creditor a lump sum amounting to less than the full debt. The payment is in exchange for the creditor considering the entire debt retired and done. By the time both creditor and debtor are in the frame of mind to consider debt settlement they’re probably at wits end with one another. The debtor is likely making late monthly payments or missing them altogether. For the debtor their crushing debt seems endless, and they don’t see a way out. The creditor is probably worried the debtor will declare bankruptcy vs settle debt and forgo all payment. In such a climate debt settlement makes sense to both of them. During settlement negotiations the creditor can represent themselves, but they usually have a debt settlement company as their representative. Settling a debt this way doesn’t remove it from your credit history, but it does stop it from escalating further. Once the last of the debt payments are made, the creditor can continue improving their credit score.
How Do You Qualify To Buy A House After A Debt Settlement?
While buying a house during a debt settlement may be the worst time to consider it, buying a home afterwards can make a lot of sense if you plan ahead. There are some steps you must take to qualify for a loan. Chances are you were doing some of these things already while managing your debt relief process, but here are our top tips on buying a home after debt settlement.
1. Start Saving
Build your savings as much as you can. You probably got well into the savings habit during your debt settlement period. That’s likely how you were able to amass your lump sum payment. Use those same practices to save money for a sizable down payment. Also keep enough to maintain as large a bank balance as possible. Having cash on hand helps when it comes time for loan qualification.
2. Reduce Spending
Once again, you probably learned this lesson during the settlement period. If you cut your expenses, you reduce the possibility of debt. More importantly you increase the likelihood of increasing your savings. Don’t get rid of things you need or really enjoy. That makes the process painful and harder to sustain. Rather you should find wasteful and unnecessary items to discard (using your car when you can use mass transit instead, or leaving lights burning in your empty house are perfect examples).
3. Improve Your Credit
Take real steps to boost your credit rating. The first step is to clear all outstanding debt. Next, you need to stay current with your regularly occurring obligations and pay your bills on time. Obtain a secured credit card, if you don’t have a card already. Following that, making card payments on time and maintaining appropriate credit utilization will help positively affect your credit. By the time you’ve saved your down payment and go house hunting, your credit report should be improved. For more tips, see our full guide: how to fix my credit myself.
4. Raise Your Debt To Income Ratio
If you’re doing the first three steps, you should be reducing your debt. When you add up all your monthly debt and divide it by your gross monthly income, you arrive at your debt to income ratio. That number is expressed as a percentage. Most banks want this ratio to be no greater then 43%. Twenty percent is considered excellent. It’s a good idea to try to diversify your income and decrease your debt, to make your debt to income ratio more attractive to a lender.
What Is The Right Type Of Mortgage To Have?
It’s important to have the right mortgage loan when you’re buying a house, especially if you’re wondering if you can get a mortgage with collections. A lot of discussion goes into term (length) and interest rate of the mortgage loan. As a rule of thumb you pay more per month if your loan term is shorter. Having a loan stretch out for more years, however, also means you pay more overall in the end. In terms of interest rates there’s always a question of whether to go with fixed or variable rates.
Anyone fresh out of a debt settlement has probably seen how quickly the winds of fate may change. For that reason alone you may be more attracted to a fixed rate. Even more importantly, interest rates are still very low, and it may be best to lock in a low number now. Whatever your decision you should also check into an FHA (Federal Housing Authority) backed loan. These are government backed mortgages. They frequently allow substantially lower down payments and offer good interest rates. The FHA program is reliable, having weathered many a real-estate storm over the decades. When you make your decision to apply for a mortgage be clear-minded and calculated. This debt will be with you for some time. Go into it with your eyes open, and make good decisions.
FAQ’s About Owning A Home After A Debt Settlement
Can I buy a house during debt settlement?
You can certainly buy a house at anytime, but to do so during a debt settlement is a terrible idea. Your credit is poor and you don’t have much money (else why would you be settling?). No solid lending institution should give you a mortgage loan while you’re in a debt settlement. Anyone who does will probably make the terms so bad you’ll be in worse financial shape going forward.
How long after debt settlement can I buy?
That’s mostly up to you. The sooner you get your credit scores up and have enough disposable income for a down payment and expenses, the sooner you’ll be ready to become a home owner.
Can you buy a house after debt consolidation?
If your debt consolidation substantially reduced your number of outstanding creditors, it could put you in better shape to qualify for a mortgage loan. If your debt to income ratio (or late payment and default history) didn’t change much, however, then a debt consolidation may not help very much in getting you a house.
How long does it take to recover from debt settlement?
Just like asking about when you should buy, this answer is up to you. The faster you raise your financial profile, the faster you’ll be able to say you’ve fully recovered from your debt settlement.
Buying A House After Debt Settlement: Final Thoughts
When all is said and done, you should feel good about seeing a debt settlement through to the end. You’re on your way to better financial health as a result of your hard work, and the good news is that you can buy a house after debt settlement. You’ve probably developed better habits. You may be looking at more savings and certainly have more peace of mind. The stability and security of home ownership is something you should investigate. It might surprise you to learn that despite their strict rules, bank officials look kindly upon people who improve their finances. Do your own due diligence to build better credit and save money. Home ownership may not be a right, but it is right there in front of you, and your chances are better than you think.
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