A lot of people in our nation file bankruptcy or consider a settlement to get out of their debt. Thus they suffer from a horrible credit score.
At some point, the people with bad credit need a mortgage. Unfortunately, they get limited options due to their bad credit. Most of the lenders close their doors to the people with bad credit. The lenders consider them as risky borrowers.
Owning a house after debt settlement can be difficult but not impossible. Yes, debt settlement compromises your financial ability to become a homeowner. But, that doesn’t mean you can’t buy a house ever.
Credit-challenged home buyers should follow 6 steps to buy a house after settling debts.
Step 1: Rebuild your credit score after debt settlement
Buying a house after settlement is tough because your credit score gets hurt once you fall into debt. The late debt payments or no payments also lower your credit score majorly.
Your accounts are in the collection means your credit score gets hurt significantly.
In addition to this, once you go for the debt settlement, it will be mentioned on your credit report.
Since you have failed to repay the entire debt and paying a reduced amount of debt in a settlement, it will be considered negative.
Well, rebuilding the credit health takes time but you can do it by following some tips.
After rebuilding your credit score, you can invest to buy a house.
a Review the credit report and find out the error in it
Pull your credit report from all the 3 credit bureaus. After you have got your reports, you must go through it carefully.
It’s because the errors in your report are responsible for lowering your credit scores. Review your credit report after a few weeks of settling your debts.Make sure all the debt accounts are marked as settled.
If you find any other errors, dispute them. Contact the credit bureaus to keep it accurate.
Inform the credit bureaus about the negative items on your account.
Make sure that they remove it as soon as possible. This will boost your credit score.
b Keep a copy of your debt settlement deal
Sometimes, you may get calls from the collectors for the money even after the settlement. To prevent this, keep the copy of the settlement agreement.
c Be sure that your debt is paid
After paying the settlement amount, check your account to verify that the amount is credited to the debt.
Also ask your debt settlement company for the document or receipt that you’ve cleared the debt.
Make sure the default account has a zero balance.
Otherwise, the debt collector can call you again for the money.
d Pay your bills on time
After paying the settlement amount, check your account to verify that the amount is credited to the debt.
You can also ask your debt settlement company for the document or receipt that the amount is credited to your debt. Make sure the default account has a zero balance.
Otherwise, the debt collector can call you again that affects your score negatively.
e Stay within your credit limit
Use only 25% of your credit limit and try not to keep any balance pending on your cards for a long time. You can use cash as much as possible instead of credit.
f Take out a secured loan
One of the best ways to repair your credit score is taking out a small amount of secured loan and paying bills on time.
A lender will allow you to take out a secured loan at a low rate of interest. As a result, your monthly payments will be affordable.
If you make your payments on time, you’ll be able to prove your lender as a responsible debtor. As a result, your credit score will get boosted.
Step 2: Be honest with your lender
You need to be very honest while talking to the lender. Explain to them why you couldn’t pay off the entire debts and opted for debt settlement.
Try to explain your financial hardship clearly to the lender.
He can offer you a mortgage loan with better terms even if you have bad credit.
You need to ensure that you will be able to repay the bad credit mortgage loan that you have taken out.
Step 3: Research the rates beforehand
Before trying to take out a mortgage loan, you should be aware of all the costs associated with it. Get knowledge about the mortgage rate, closing costs, maintenance fees, and processing charges. Analyse your current income to understand whether or not you can afford the loan.
This will help you manage the loan better. Research on the different mortgage loans available at the marketplace.
Make a comparative analysis of different mortgage quotes to find the best one for you.
Step 4: Save enough money for a down payment
You should try to save money so that that you can put a bigger amount towards the down payment; it helps to avoid a huge loan. After settling your debts, you should try to practice good financial habits.
It helps to set aside money each time you receive your monthly paycheck.
Step 5: Consider FHA loan
The FHA loan program is a government-backed program that makes purchasing of a home easier.
The qualifying criteria of FHA loans are easy as compared to other conventional mortgages. It is meant for households from middle to low income.
#Why FHA loan?
- If you don’t have a perfect credit score, then FHA loan can be the best option for you. You can take out an FHA loan with a relatively lower score.
- You can go for the FHA loan after paying off your debts through a debt settlement program. If you are able to maintain a good credit after going through a bankruptcy, then you can obtain an FHA loan 2 - 3 years from your bankruptcy discharge.
- If your credit score is in an excellent shape after foreclosure, then you can get an FHA loan within 2 - 3 years from the final date of your foreclosure.
Step 6: Avoid accumulating more debts
It is true that using a credit card helps to increase your credit score. But, you have to pay the bill in full and within the stipulated time. If you again miss the credit card bill payments, your credit score will never improve and you won’t be able to buy a house.
If you want to apply for a mortgage after settling your debts, you have to work hard to add positive items to reduce the effect of negative marks on your credit report.
Remember, obtaining a mortgage means you are taking out a debt again and that can be risky for you if you don’t manage the new debt properly.
