Can You Buy a House After Debt Settlement?
8 MIN READ
Published January 23, 2024 | Updated January 30, 2024
For most people, buying a house is the most important and the largest purchase they’ll ever make. Regardless of when you buy a house, getting a mortgage is a major financial responsibility that requires a lot of planning.
If you recently settled your debts, things can be especially complicated. You may be wondering, can I buy a house after debt settlement? A healthy credit score of around 620 and a low debt-to-income ratio are required to qualify. However, some lenders are willing to work with borrowers with a credit score as low as 500. If you’re willing to work to improve these, you may be able to buy a house.
Can You Buy a House After Debt Settlement?
Yes, you can buy a home after debt settlement. When applying for a mortgage, the amount of debt you have impacts your eligibility. Debt settlement can help you decrease your debt, especially if you’ve been delinquent.
While debt settlement can stay on your credit report for seven years, you don’t always need to wait that long to purchase a house. Once you improve your credit score to 620, there are many lenders who will be willing to work with you. However, there may be some restrictions on the terms and loan amount you qualify for, depending on your financial situation.
“The key to qualifying for a house is a good credit score,” explains Teresa Dodson, a financial expert and the founder of Greenbacks Consulting. “However, even more important is having very low to zero debt owed. Debt Settlement can help you pay off your debts faster and may be the best way to qualify later,” she shares.
How Do You Qualify To Buy a House After Debt Settlement?
Qualifying for a mortgage after debt settlement can be challenging, but there are a few ways you can show lenders that you’re now financially stable. You may be able to overcome the impact of a debt settlement by
- Making sure all your accounts are current
- Keeping your credit card balances low
- Maintaining steady employment
- Saving for a larger down payment
- Lowering your DTI ratio
- Increasing your credit score
- Being honest and upfront about past financial struggles
How Is Home Buying Affected by a Debt Settlement?
To answer the question, “Can I buy a house after debt settlement?” it's important to first understand how debt settlement impacts your ability to buy a home. Lenders will be able to see settled debt for seven years on your credit report.
However, lenders look at many other factors when evaluating your creditworthiness, such as your debt-to-income ratio, credit score, and more. Here are a few ways debt settlement can impact those factors.
Whether you negotiate debt settlement on your own or work with a debt settlement company, when you don’t pay off your debt in full, you can expect it to have a negative impact on your credit score.
Another important point to remember is that lenders are only likely to accept a debt settlement offer if they believe they won’t be able to recover the amount due. It's likely that you’re settling an account because you’re already several months behind on your payments. These missed and late payments would have already lowered your credit score.
Other than your credit score, lenders will also determine your mortgage eligibility based on factors like your debt-to-income ratio. This ratio compares how much of your monthly income goes toward debt payments. A low DTI ratio is an important mortgage requirement.
A DTI ratio under 43% is good, while a 36% DTI ratio is considered ideal. If half of your income is going towards debt payments each month, it may be difficult for you to qualify for a mortgage. Debt settlement is one way to bring down your DTI ratio if you’re struggling to pay down balances.
How To Improve Your Chances of Getting Your Mortgage Approved After Debt Settlement
If you’ve recently gone through a debt settlement but want to purchase a home, you can reach your goal sooner with the right strategies. We recommend following these steps as soon as possible after debt settlement to improve your chances of qualifying for a mortgage.
Rebuild Your Credit
If you worked with a debt settlement company, they may have discussed how debt settlement may impact your credit score as you go through settlement. Rebuilding your credit may take time and some effort, but it’s possible. Start by getting a free copy of your credit report from all three credit bureaus to check the impact.
Start rebuilding your credit by paying all your bills on time. Reduce your account balances on credit cards to keep them below 30% to improve your chances of getting a mortgage approval. You can also establish a positive payment history by getting a secured credit card or a credit builder loan. Once you have a good credit score, it’ll be easier to qualify for a mortgage.
Demonstrate Financial Stability
Demonstrate financial stability by maintaining steady employment and income. If you plan to apply for a mortgage, changing jobs can raise concerns. It's best to stick to one employer for a longer time. A steady source of income will also allow you to budget better and allow you to start saving money for a down payment.
Keep Your Debts Low
If you have any debts, try to pay them down to improve your debt-to-income ratio. Lenders will determine your ability to make mortgage payments by evaluating your secured and unsecured debt payments in relation to your income. Use debt repayment strategies like debt avalanche or snowball to pay down debts faster.
If your credit score has improved, you may be able to qualify for a debt consolidation loan at a lower rate to combine multiple debts into one, which may make it easier to pay down debts.
Save for a Larger Down Payment
Since you’ve recently overcome a difficult financial situation, it's best to take your time when preparing to buy a house. One way to do that is by saving for a larger down payment, which will also improve your chances of getting a mortgage approval.
A larger down payment will also lower your mortgage payments, making it easier for you to stay consistent with payments. Instead of rushing to buy a home, take the time to save at least 10% as a down payment.
Apply for an FHA Loan
When comparing an FHA vs. a conventional loan, an FHA loan is easier to qualify for. An FHA loan is backed by the Federal Housing Authority (FHA) and offers lower down payments and good interest rates.
You can qualify for an FHA mortgage with a FICO score as low as 580. You’ll also be able to qualify for a mortgage with a down payment of just 3.5%. However, we recommend putting down at least 10% if you can to keep your mortgage payments lower.
How Long Should You Wait After Debt Settlement?
If you’re wondering how long to wait to buy a house after debt settlement, it will depend on your financial situation and how quickly you can improve key aspects like your credit score and DTI ratio. However, we don’t recommend buying a house right after debt settlement because it’ll be difficult to qualify and get a competitive rate.
Ideally, you should wait at least two years after debt settlement. This will give you the time to improve your credit score, save for a larger down payment, pay down any other debts you have, and find ways to maintain a stable income.
Start Taking Steps Today To Improve Your Chances of Buying a House Sooner After Debt Settlement
Debt settlement is often the first step in getting your debt under control and improving your debt-to-income ratio. To move forward in your home-buying process, you’ll then have to work to rebuild your credit. Check to see if you qualify for an FHA mortgage, and take your time saving for a larger down payment to keep monthly payments affordable.
With a little patience and thorough planning, you can avoid impulsive financial decisions that may impact you later. Once you get a home loan, strive to keep your other debts and expenses down and practice healthy credit habits. Consider getting credit counseling if you’re struggling with money management.