How Long After Debt Settlement Can I Buy a House?

Get clarity on buying a house post-debt settlement and find out how long you may need to wait before you can qualify for a mortgage.

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If you’ve ever paid a debt settlement to one of your creditors, you know that settling debt can solve some of your financial problems while creating other ones.

For instance, hiring a debt settlement company can leave you with severe credit damage and no spare cash, both of which make it harder to qualify for a mortgage. Once your debts are settled, you might need a few years to recover and become eligible for a conventional (meaning not government backed) mortgage.

On the other hand, paying off an old collection debt might not delay your timeline to buy a home at all, and can even make you more attractive to some lenders.

“If their credit scores are good enough, a home buyer can qualify for a conventional mortgage while still in debt settlement,” says Dan Green, CEO of “There’s no designated waiting period like with a bankruptcy or recent short sale.”

What Is Debt Settlement?

Debt settlement involves paying off your debt for less than the amount you owe. To settle your debt, either you or a third-party negotiate with your creditor(s) to arrive at an acceptable payment amount and set the details of your repayment.

There are a few ways you can go about debt settlement, and each one has a different impact on your credit and your ability to qualify for a mortgage down the line:

  • For-profit debt settlement: You can pay a for-profit company to negotiate with your creditors and distribute settlements to them on your behalf. But the credit damage and fees are often severe, since you’ll go 2-4 years without making payments on your debt before negotiations conclude.
  • Nonprofit debt settlement: You can work with a nonprofit agency that sets up a monthly payment plan with your creditors. Unlike for-profit settlement, you’re guaranteed to have 40%-50% of your debt forgiven after three years, and you won’t be charged interest during your repayment, but your credit scores can still take a big hit.
  • Work directly with your creditors and/or debt collectors: You can attempt to negotiate settlements on your own, however you will likely need to be several months behind on payments before creditors will even consider negotiating. Those missed payments cause damage to your credit, as does settling a bill for less than the full amount you owe. On the other hand, some mortgage lenders may require you to pay off certain debt accounts before they’ll approve your loan, and a direct settlement can be the quickest and most wallet-friendly option.

The Impact of Debt Settlement

Debt settlement generally has a negative impact on your credit and finances in the short-to-mid-term, especially if you choose to go the for-profit route, but settling can potentially have a positive impact in the long-term.

Here are a few ways your chances of buying a home could be affected by settling debt, for better or for worse.


  • Potentially helps you qualify for a mortgage: Paying off certain debts can help your chances of qualifying a mortgage. In some cases, it may even be a requirement. (Be sure to ask your lender for guidance).
  • Could save you money: Negotiating a settlement can save you money on debt repayment.
  • Prevents more missed payments: Paying a lump-sum settlement can prevent future missed payments, late fees, and more damage to your credit.


  • Potential for major credit damage: If you intentionally miss payments on loans and credit cards in order to negotiate a settlement (or for any other reason) you’ll see a major loss of points from your credit scores. On top of that, your scores will take another big hit if a creditor sends your account to debt collections due to non-payment.
  • Settling can be expensive: With for-profit settlement, you’ll have to send monthly payments to a third party. Creditors also charge late fees when you miss payments, and they may increase your interest rates. Plus, you might be taxed on the debt that’s forgiven as a result of your settlement.
  • Can cause legal issues: Creditors may opt to sue you for the money rather than wait to negotiate a settlement with you or your debt settlement company.
  • Doesn’t erase past credit damage: Settling debt does not remove negative account information from your credit reports. It remains there for seven years.
  • Might not be required by your lender: You don’t have to pay off medical debt to qualify for a mortgage. For conventional loans, you may not be required to pay other overdue debt either, unless it’s owed to the federal government (think taxes and student loans). So you could be better off saving the money for your down payment.

When to Buy a House After Settling Debts

Your timeline to buy a home after debt settlement depends on the condition of your credit and finances, and the type of loan you want. The worse your scores are and the less cash you have left over after settling, the longer the process will be to qualify for a conventional loan.

Instead of focusing on a specific timeline, think about improving your situation so that you meet (or exceed) lender requirements. These are the areas you’ll likely need to improve after settling your debt:

  • Credit scores: Most lenders require FICO scores around 620 or higher to qualify for a mortgage. Some loans, including government-backed loans, however, have lower requirements.
  • Down payment: The amount you need for your down payment depends on the lender, and some lenders require as little as 5% or even less. But the larger the down payment, the more likely you are to qualify loans and get affordable terms.

How To Qualify for a Mortgage After Debt Settlement

Even if debt settlement leaves your credit or finances in bad shape, there are ways to make improvements and qualify for a mortgage.

“The rules for getting a mortgage approved are always the same,” says Green. “Debt settlement or not: keep a steady-paying job, pay your bills on time, and have some money saved up in reserves.”

Here are steps you can take to speed up the process of recovery and can qualify for a mortgage sooner.

Stay Current on Debts

The biggest factor that determines your credit scores is whether or not you make your debt payments on time. To improve your scores, avoid missing payments on credit cards and loans or else you’ll find yourself back at square one.

Pay off Credit Cards

Your credit card balances also play a major role in determining your credit scores. When you pay down your credit card balances, you can expect your scores to improve.

Have a Large Down Payment

The larger your down payment, the better your chance of getting approved for a mortgage, getting larger loan amounts, having lower interest rates on your mortgage and qualifying for fixed interest rates.

If you have no or low funds available for a down payment, you may be limited to more restrictive home loan types, such as a USDA loan or VA loan.


Adjusting your budget can help you rebuild your finances, improve your credit, and avoid problems with debt in the future. Make it a priority to set cash aside for an emergency fund so that you won’t go into debt to cover unexpected expenses down that line.

If possible, set up a recurring, automatic deposit to your savings account so that you can start building up your down payment funds and your closing costs, too.

If your budget is simply too tight to allow for any savings, even after you cut unnecessary spending, look for ways to increase your income and set aside the extra cash you earn.

Keep a Steady Income

Good credit and savings habits can only go so far if you don’t have steady income. Plus, many lenders require you to have two years of work history in the same industry.

Instead of leaving your future paychecks to chance, plan ahead for how you’ll weather upcoming changes, like seasonal dips in your work hours. Even better, consider how you can steadily increase your income through annual pay raises, promotions and/or finding a new employer.

Limit Credit Applications

Every time you apply for a new credit card or loan, your credit scores can drop a few points. Instead of chipping away at your scores by applying for new accounts unnecessarily, wait to apply until you’ve found a mortgage you’re likely to qualify for.

Loans With Lower Credit Requirements

Some loans are built for borrowers with low credit scores. If your credit is the main obstacle, consider applying for an FHA loan or another government-backed mortgage, since the credit score requirements are often lower than conventional loans.

Discuss Your Financial Struggles

It may sound counter-intuitive, but people struggling with debt might want to discuss their financial challenges with a lender. You don’t have to share your whole story with a loan officer but let them know about specific issues you have with your credit and finances so they can give you tips on what to address before applying.

Reduce Debt To Income Ratio

The amount of debt you owe in comparison to your income will also impact whether or not you qualify for a mortgage. For many lenders, your debt (including the mortgage payment) can’t exceed 36% of your monthly gross income. So paying down your debt and/or increasing your income will help you out in this area, too.

Debt Settlement as a Stepping Stone

Completing debt settlement is a big financial milestone, but buying a home is an even bigger one. While this article is chock-full of tips on how to qualify for a mortgage after settling debt, the best steps you can take will depend on your specific situation.

Want personalized advice on how you can qualify for a mortgage sooner? A certified credit counselor from a nonprofit credit counseling agency can help. When you meet with a credit counselor, you’ll get advice for improving your credit profile, tips on finding the best loan, and if needed, you can even get help determining if you should settle your debt.

About The Author

Sarah Brady

Sarah Brady is a Personal Finance Writer and educator who's been helping people improve their financial wellness since 2013. Sarah writes for Experian, Investopedia and more, and she's been syndicated by Yahoo! News and MSN. She is a workshop facilitator and former consultant for the City of San Francisco's Affordable Home Buyer Programs, as well as a former Certified Housing & Credit Counselor (HUD, NFCC). Sarah can be contacted via


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