Can You Buy a House After Debt Settlement? Tips for Buying (2024)

Owning a home is a big part of the American dream, but for many would-be home buyers, a mountain of debt is standing in the way.

How you deal with eliminating that debt can have a major impact on your ability to buy a home.

Debt settlement is one option for reducing what you owe, but it’s far from a quick fix. Debt settlement could saddle you with more financial problems, like lower credit scores and a bill from the IRS, both of which could make it harder to qualify for a mortgage.

Ultimately you can still get a mortgage after debt settlement, but you have to approach the process with some strategy and caution.

What Is Debt Settlement and What Happens After You Settle?

Debt settlement involves offering creditors a lump sum of cash that’s less than the full amount you owe. If the creditor accepts your offer, the remaining amount you owe will be canceled or forgiven.

But that’s not the end of the story.

If you hire a for-profit company to “help” settle the debt, you could end up with bigger problems than a credit card bill. Why? These companies charge you monthly fees to take over your accounts, but they don’t give money to your creditors right away. In the meantime, your credit scores can tank from the missed credit card payments and you might even face lawsuits from your creditors.

If you settle the debt yourself, you might avoid some of that damage, but you could still end up with a tax bill if the amount of debt forgiven is over $600.

To reduce the damage of debt settlement and speed up the timeline to homeownership, you might consider working with a nonprofit debt settlement agency instead (more on this below).

Can You Buy a Home After Debt Settlement?

Yes, you can buy a home after debt settlement. You’ll just have to meet the lender’s requirements to qualify for a mortgage. Unfortunately, that could be harder after you settle debt.

If you’re asking, “How long after debt settlement can I buy a house?,” take a few minutes to determine where you stand with these common lender requirements for a mortgage:

  • Credit rating: Most mortgage lenders require credit scores of at least 620 for approval and at least 760 to qualify for the best rates. If you have new collection accounts, recent missed debt payments or no credit history at all, you may need a year or more to build positive credit history.
  • Debt-to-income ratio (DTI): This ratio represents how much of your monthly gross income (before taxes and withholdings) goes toward debt payments. In order to qualify for a mortgage, you typically need a DTI of 36% or less, with your mortgage payment included in the calculation.
  • Employment history: Most lenders require you to have at least two years of steady employment in order to approve you for a mortgage, but some lenders may have alternative qualifications.
  • Down payment: Making a down payment of 20% or more is ideal since it frees you from having to pay for private mortgage insurance (PMI). Some lenders accept less, but the higher your down payment the better your chances of qualifying for a mortgage.

How Long After a Debt Settlement Can You Buy a House?

There’s no set timeline for how long it takes to get a mortgage after debt settlement. Your ability to qualify for a mortgage will depend on how well you meet the lender’s requirements on the issues raised above (credit score, DTI, employment and down payment).

No matter who you are, you can speed up the process by adding positive information to your credit reports, saving more for a down payment, increasing your income and paying down your debt.

See Also
Debt Relief

How Do You Qualify To Buy a House after a Debt Settlement?

To qualify for a mortgage, you have to show a lender you’re capable of taking on a new financial responsibility and paying back a large debt. Here are some things you can do to demonstrate your creditworthiness and speed up the timeline for getting approved:

Budget

Do you feel like you can afford a mortgage? Without a budget, it’s impossible to know for sure. Instead of guessing, make a simple budget. A budget should help you find ways to cut costs and get into a home faster. For example, if you can budget to save $500 a month for a down payment instead of $250, you’ll reach your goal in half the time.

To get started, make a list of all of your household income and expenses. Be sure to look over your financial account statements so you catch everything. Then, look through the items in your budget and ask yourself the following:

  • Income questions:Can I increase any sources of income? Is it time to ask for a raise or look for a new job? Is there something I can rent or sell to bring in extra money?
  • Spending questions: Is this expense more important than buying a home? Can I reduce or eliminate this cost, even if it’s just for a few months?

Save for Down Payment

After you review your budget, follow up with steps to put a savings plan into action. That can include any and all of the following steps:

  • Cut up credit cards and/or delete credit card information from your online accounts.
  • Open a dedicated bank account for your down payment funds.
  • Set up an automatic deposit to your savings from every paycheck.
  • Move your down payment into a CD or high-yield savings account (HYSA) where it will earn more interest while you prepare to buy a home.

Pay Down Your Debt

Debt can be a major obstacle to homebuying. If your DTI is above 36%, you’ll likely need to pay off debt before you can get approved for a loan. You may even need to prioritize this goal ahead of saving for a down payment, since the interest charges on high-APR debt (think credit cards and payday loans) can quickly eat away at your savings.

One of the best methods for paying off debt is the debt avalanche method. Here’s how it works:

  1. Make a list of your debts, starting from highest annual percentage rate (APR) to lowest.
  2. Make the minimum payment monthly payment due on all of your debt but put any extra money you have toward the first debt on your list.
  3. Once you pay off the first debt, roll over your extra money to the next debt on your list.
  4. Continue this pattern until all debt is paid off.

Reduce Your Debt To Income Ratio

Paying off debt can reduce your debt-to-income ratio, but it’s still a good idea to calculate your DTI and make sure you’re below 36%. If paying down debt won’t get you there fast enough, look for ways to increase your income, too.

To calculate your debt-to-income ratio, follow these steps:

  1. Calculate your total minimum debt payments due each month. Include your mortgage or rent, loans, credit cards and any debt you’ve cosigned on.
  2. Add up your gross monthly income. If you’re paid every other week (26 pay periods per year), you can find the correct monthly figure by dividing your annual gross by 12.
  3. Divide your monthly debt payments by your monthly gross income.
  4. Multiply by 100 to convert the figure to a percentage.

As an example, here’s what the calculation would look like if you had a monthly income of $6,000 and $2,000 a month in debt payments:

($2,000 debt payments / $6,000 gross income) x 100 = 33.33% DTI

Look Into FHA or Other Mortgage Loan Types

Another way to speed up the homebuying process is to look for a loan with lower credit score requirements and/or a lower down payment requirement. These are all good options to consider:

  • FHA Loans: Loans backed by the Federal Housing Administration (FHA) only require a 3.5% down payment and a minimum credit score of 500.
  • First-Time Home Buyer Assistance: Your state, county, or city might offer special mortgage assistance programs for first-time buyers. These programs sometimes accept down payments as little as 3% and low credit scores. Down payment assistance may be available, too.
  • USDA Loans: The United States Department of Agriculture (UDA) provides mortgages for homes in rural areas, with down payment as low as 1%. If your credit scores are below 640, you might be able to qualify based on your rent history, auto payments or utility payments.
  • VA Loans: Servicemembers and veterans may qualify for VA-backed loans, regardless of their credit scores. The VA doesn’t require a down payment and doesn’t have a maximum DTI, but your lender might.

If you’re searching for more info on these programs online, be sure to avoid loan scams by visiting reputable websites only. For government-backed loans, stick to websites ending in .gov, including HUD.Gov and USDA.Gov. For non-profit homebuyer assistance, stick to sites ending in .org.

Considering Debt Settlement To Buy a Home? Get Help Settling Your Debt.

For a better approach to debt settlement — one that doesn’t make the path to homeownership more difficult — the best approach could be a Credit Card Debt Forgiveness program. This approach to debt settlement is only offered by nonprofit credit counseling agencies like InCharge Debt Solution. It looks completely different than for profit solutions and settling debt on your own. These are the highlights:

  • The creditor agrees up-front to waive 40%-50% of your bill.
  • You pay your remaining balances over 36 months.
  • There’s no interest charged on your payments.
  • Debt collectors can’t contact you while you’re on the program.

When you connect with a free credit counselor you can go over all your options for settling debt. They can answer questions like, “How can I buy a house after debt settlement?” discuss professional tips to help you choose the right program, and help you build a roadmap to get your credit scores on track.

Can You Buy a House After Debt Settlement? Tips for Buying (2024)

FAQs

Can You Buy a House After Debt Settlement? Tips for Buying? ›

Tips to Buy a Home After Debt Settlement

Will debt settlement prevent me from buying a house? ›

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 Homebuyer.com. “There's no designated waiting period like with a bankruptcy or recent short sale.”

How long after debt relief can you buy a house? ›

However, most experts recommend waiting at least 2 years after finishing debt settlement before applying for a mortgage. Waiting gives you time to: Improve your credit – Negative marks from debt settlement stay on your credit reports for 7 years. But their impact lessens with time.

How long does it take to rebuild credit after debt settlement? ›

There is a high probability that you will be affected for a couple of months or even years after settling your debts. However, a debt settlement does not mean that your life needs to stop. You can begin rebuilding your credit score little by little. Your credit score will usually take between 6-24 months to improve.

How long after debt settlement can I buy a car? ›

While the effects of bankruptcy hang around for 7 to 10 years on your credit report, that's not how long you must wait to borrow money. The impact of the penalty decreases each year, and it's even possible to get a car loan within six months of your discharge.

Can I get loan after debt settlement? ›

Yes, it is possible to get a loan after a settlement, but it can be more challenging depending on the nature of the settlement and your financial situation. Here are some factors to consider when trying to get a loan after a loan settlement: Credit History: Your credit history plays a vital role in loan approval.

Should I be completely debt free before buying a house? ›

If you have a substantial amount of high-interest debt, consider paying it down before saving for a house. Any interest – but especially high-interest debt – can significantly extend your debt repayment timeline and eat away at the money you could be saving for a home.

What are the cons of debt settlement? ›

Disadvantages of Debt Settlement
  • Debt Settlement Fees. Many debt settlement providers charge high fees, sometimes $500-$3,000, or more. ...
  • Debt Settlement Impact on Credit Score. ...
  • Holding Funds. ...
  • Debt Settlement Tax Implications. ...
  • Creditors Could Refuse to Negotiate Your Debt. ...
  • You May End Up with More Debt Than You Started.

What debt is considered when buying a home? ›

Back-end ratio

The back-end DTI includes all your monthly debt payments — such as credit cards, student loans, personal loans and car loans — in addition to the mortgage payment. Back-end ratios tend to be higher, since they take into account all of your monthly debt obligations.

What happens after debt settlement? ›

After you settle debt, the amount you don't pay will be charged off by the creditor or collector. Charge-offs will stay on your credit for seven years.

Will my credit score increase after settlement? ›

Debt settlement will have a negative impact on your credit score, even though you are reducing your debt obligations. High credit scores are designed to reward those accounts that have been paid on time according to the original credit agreement before they're closed.

How do I fix my credit score after debt settlement? ›

Here are a few tips to rebuild your credit:
  1. Pay your bills on time — all of them.
  2. Don't live on credit — try only to use less than 30% of your available credit.
  3. Use secured credit cards to build positive payment history.
  4. Use a variety of credit (loans, credit cards, lines of credit, etc.).

How can I improve my credit score after debt settlement? ›

Steps to Improve CIBIL Score After Settlement
  1. Build a Good Credit History. ...
  2. Convert Your Account Status from 'Settled' to 'Closed' ...
  3. Pay Your Dues Regularly. ...
  4. Clear Any Outstanding Dues. ...
  5. Get a Secured Card. ...
  6. Keep Available Credit Limit Above 50% ...
  7. Do not Apply for or Enquire About Loans. ...
  8. Continue to Utilize Credit Cards.

Is debt settlement better than not paying? ›

Despite the potential downside, settling a debt by making partial repayment is better for your credit (and peace of mind) than neglecting it and leaving it unpaid. If you ignore a debt, the creditor will typically turn it over to a collection department or third-party collection agency.

Does debt settlement look bad? ›

Using debt settlement services can have a negative impact on your credit scores and your ability to get credit in the future.

Is paid in full better than settled? ›

Settling has more of a negative impact on your credit than paying in full. When you settle, this shows up on your credit report and signals to lenders that you have a history of not repaying the full amount of your loan. This can lower your score and will stay on your credit report for six years.

Does debt settlement affect mortgage? ›

Debt settlement can do long-lasting damage to your credit score, affecting your ability to get a loan, a credit card, or even housing or a job in the future. Your creditors may take legal action against you, such as legal judgments, lawsuits, collection activities, and freezing your bank accounts.

Does it look bad to settle a debt? ›

Debt settlement typically has a negative impact on your credit score. The exact impact depends on factors like the current condition of your credit, the reporting practices of your creditors, the size of the debts being settled, and whether your other debts are in good standing.

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