Can You Buy a Home While on Credit Counseling?

People normally enter credit counseling when they are struggling with burdensome debt and need help working through it.

In most cases, buying a home and taking on a mortgage isn’t something they’d want to consider until their bills are under control. Credit counseling is a very good step in that direction. It’s a great tool for paying off debts and clearing a path to homeownership.

Not all debt is bad, and an affordable mortgage can be one of the best investments of your life. Credit counseling helps you reduce bad debt – the type associated with credit cards – so that you can afford the good debt tied to buying a home.

Credit counseling doesn’t stigmatize a mortgage applicant. In fact, credit counseling is a good thing if it helps improve a poor credit score and a subpar debt-to-income ratio. Since credit counseling mitigates these financial problems, it can be the path to homeownership and not an impediment.

After you enter a credit-repair program and begin paying down debt, your financial profile will improve, making you an ever-stronger candidate for an affordable mortgage.

The question for a prospective homebuyer with debt isn’t whether credit counseling will block a home purchase but whether it achieves the goal of raising a credit score and making the person a better candidate for a mortgage.

How Credit Counseling Works

Credit counseling brings order to what are often chaotic personal finances. People who struggle to manage money turn to a nonprofit credit counselor for guidance. The process often involves creating a debt management plan that the counseling agency oversees for a fee, though some people use the counselor’s advice to eliminate debt themselves.

Not everyone who seeks credit counseling has a history of mismanaged finances. Some have suffered an unexpected setback such as a major medical expense or a divorce. Whatever the reason for seeing a counselor, the goal is get debt under control and reestablish good credit. That often means not using credit cards during a debt repayment plan, a commitment that is often challenging for those used to spending freely.

If you’re someone whose debts are becoming unmanageable, consulting a nonprofit credit counselor could be the best move you’ve made in a long while. It can become the path to an improved credit score and the solid financial footing needed to qualify for a mortgage.

Credit Counseling for Buying a Home

Even those with poor credit have been able to buy homes, though since the global financial meltdown that began in 2008, lenders have become much less willing to offer mortgages to those with insufficient income and poor credit scores. Ideally, an aspiring homebuyer will begin a housing search with a strong credit score and low debts. For those with poor scores and problems paying debts on time, credit counseling can offer a path to redeeming one’s financial reputation. .

If you are struggling with debt, it is a good idea to create a debt management plan before looking for a home. The more you reduce your debt and improve your credit score, the better a candidate you’ll be when applying for a mortgage.

Before applying for a mortgage, it’s a good idea to order a free copy of your credit report from one of the nation’s three credit-rating bureaus. The report will let you know how various factors impact your score. You should also review the report for errors.

Even if your debts aren’t large, you should consider a pre-purchase session with a credit counselor for advice on financial habits that are important to homeownership and advice on how large a mortgage you can reasonably afford. The counselor will review the various mortgage options available and suggest remedial steps if your credit score needs improvement.

This is usually an hour-long meeting that typically will cost $30 to $130.

Credit Counseling & Mortgages

Credit counseling by itself isn’t a dealbreaker for prospective homebuyers trying to qualify for a mortgage. What’s more important is why someone is seeking counseling. If the reason is troubled personal finances and a credit counselor recommends and sets up a debt management plan, it might be difficult finding a mortgage lender willing to make a conventional loan.

Cash flow is very important. Someone on a debt management plan might have enough money left each month to afford mortgage payment after paying a debt installment and other living expenses. 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.

Before the housing bubble burst in the early 2000s’ Great Recession, lenders were much freer with their money. It was the era of the subprime loan, and homebuyers were often approved for mortgages they ultimately couldn’t afford. After the bubble popped, government regulators forced lenders to tighten their underwriting requirements, which meant loan applicants needed stronger financial profiles to qualify for mortgages.

Lenders today often won’t offer mortgages to applicants with subprime credit scores. Those with low credit scores can expect to pay more interest. Scores below certain levels are disqualifying.

Debt management plans aren’t all created equal. In some instances, a counselor will suggest you create you own plan and give you advice on how to execute it. In others, a debt management agency will consolidate your debts on multiple credit cards into a single debt that you pay monthly.

As you work with a counselor and your credit score improves, you become a stronger candidate for a mortgage. Lenders are more concerned with your credit score and your debt-to-income ratio than whether you are in credit counseling. A nonprofit credit counselor will go over your situation and explain how taking different steps to increase your score might impact your ability to qualify for an affordable mortgage.

When Can I Buy a Home?

Most lenders aren’t concerned that you’re working through a debt management plan unless lenders write off part of what you owe. They are most concerned with your credit score and your debt to income ratio.

The reason is simple. Many lender write mortgage and collect fees associated with them but have little interest in holding debt. They sell the mortgages they generate on the secondary mortgage market. In order to be traded, the mortgage must conform to underwriting standards. Two of the largest buyers of mortgages are two giant federally chartered companies, known as Fannie Mae and Freddie Mac, that buy and package mortgages into securities.

Fannie and Freddie holds some of these mortgages but sell others to investors. In order to assure investors that the securities are sold investments, they require that all the mortgages that back a security conform to standards.

When a bank or mortgage broker decides whether to lend you the money you need to finance a home, it uses Fannie Mae and Freddie Mac checklists to make sure you are a good risk. These checklists look at your ability to repay a loan, but they don’t specifically mention debt management plans.

As a prospective home buyer, you should get to know what mortgage issuers want to see. A credit counselor can help you with this, letting you know the steps you must take to qualify for a mortgage at a market interest rate.

If your credit score needs improvement, you need to follow your counselor’s advice, pay down debts either on your own or through a debt management plan and limit your housing search to dwellings you can afford. Then check for improvements as your credit score is updated.

Conclusion

Entering the housing market with a poor credit score and a pile of debt is almost always a bad idea, but if you work to correct your credit problems and enhance your score before beginning your search, you’re much more likely to reach your goal.

If you have financial problems, visiting a nonprofit credit counselor and designing a remediation plan can make a huge difference. The counselor will review your finances and recommend an action plan, which might include enrolling in a low-cost debt management plan.

The better your credit score, the more likely you’ll qualify for a mortgage with an affordable interest rate. Remember, repairing your credit score takes time. Don’t jump at a counseling agency or a debt settlement firm that promises a quick fix – these are often not legitimate businesses.

» Learn More: How Long After Debt Settlement Can I Buy a House?