Can You Get Approved For A Mortgage When In Credit Counseling?
Check your new rate (December 31, 2021)
What is credit counseling?
Reputable nonprofit credit counselors can teach you how to create and stay on a budget, get out of debt, and save for the future.
If you start making payments on time and lowering your account balances, it should increase your credit score and put you in a better position to get approved for a mortgage.
Incidentally, the counseling agencies do not report to the credit bureaus that you are taking credit counseling or other consumer education.
Debt management plans (DMPs) can hurt credit
Many times, however, counseling services put their clients into Debt Management Plans, or DMPs. This can be a suitable tool for erase your debts.
With a debt management plan, you make a one-time monthly payment to your counseling agency, which then distributes the monthly amounts to your creditors.
Often times, the agency will ask the creditor to reduce your interest rate and your payment. However, if you are making reduced payments, your creditors may report it to the credit bureaus.
This usually takes points from your credit rating. Additionally, creditors can flag the account as in a DMP if they accept a reduced payment or make other concessions for you.
When entering a DMP, you usually need to close the included accounts. This can harm your FICO.
Finally, know that you will be held responsible (and this will likely be carried over to your credit history) if your DMP is behind in its monthly payments to your creditors.
Before committing to a DMP, ask your creditors how the account will be reported to the credit bureaus, so you can make an informed decision.
You can buy a house while you are in credit counseling or in a DMP
What do mortgage lenders think of DMPs?
If your credit score and payment history are in their wheelhouse and your debt-to-income ratio is okay, most mortgage lenders don’t care whether you’re on a plan or not.
Neither Fannie Mae nor Freddie Mac’s underwriting guidelines specifically mention credit counselors or DMPs for compliant loans.
Check your new rate (December 31, 2021)
Fannie, Freddie and your DMP
However, some compliant lenders have posted their own guidelines online. In these documents, the term “debt management plan” is not used at all.
For loans underwritten with Fannie Mae’s Desktop Underwriter (DU) software, underwriters are instructed, “Regardless of DU’s findings, the presence of a consumer credit counseling service does not alter the recommendation of subscription. “
Freddie Mac Lenders get similar advice:
“Participation in or carrying out credit counseling should not be the sole determining factor in credit decision.
If a valid credit score is obtained and the credit history meets all the requirements for the individual loan program, no further credit assessment is required.
However, if your loan is taken out manually, by humans, the decision may be different.
Underwriters are expected to use their best judgment, and opinions may vary.
In addition, compliant mortgage lenders are allowed to “overlap” requirements that are more stringent than agency minimums.
FHA Home Loans
FHA mortgage the guidelines mention consumer credit counseling payment plans, and it’s okay to join and get a home loan if:
- You are at least 12 months in the plan;
- You have made all required payments in full and on time; and
- You have written permission from the consulting agency.
This is almost identical to the FHA’s position on Chapter 13 bankruptcies, which are in effect court-ordered debt management plans.
Alternatives to DMP
If you want to consolidate your debts and to reimburseyou can do this outside of a debt management plan. This can help you keep your FICO score higher and make mortgage approval more likely.
For example, if you consolidate your credit card debt with a fixed personal loan, your usage rate and your credit score usually improve.
If you own a property with some equity, a second mortgage or Home Equity Line of Credit (HELOC) can lower your monthly payments and lower your interest rate.
Even a Chapter 13 Bankruptcy maybe better than a standard DMP.
First, all creditors are required to participate. Second, the court determines a payment you can afford.
If you make all of the plan’s payments over a (typically) five-year period, you can get out debt-free. All remaining balances are written off.
Finally, the interest on the accounts does not continue to accumulate during your repayment. Even though the immediate effects of filing are harsh, in the long run, bankruptcy may be the best solution.
You can be approved for an FHA home loan after 12 months of on-time payments in your bankruptcy plan, if you get court or trustee approval.
What are the mortgage rates today?
Mortgage rate compliance depends a lot on your credit score. Credit counseling and / or debt management plans can increase or decrease this score. Check with several mortgage lenders and find out about their prices and guidelines when buying a home while you are seeing credit counselor.
Show me today’s rates (December 31, 2021)
The information on The Mortgage Reports website is provided for informational purposes only and does not constitute an advertisement for any products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, its parent company or its affiliates.