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Can You Buy A House While In Credit Counseling?

Gina Pogol
The Mortgage Reports editor

Can You Get Approved For A Mortgage When You’re In Credit Counseling?

If you’re working out money management problems through credit counseling, that can be a good thing. But can you buy a house while in credit counseling?

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What Is Credit Counseling?

Reputable, non-profit credit counselors can teach you to create and stick to a budget, get out of debt and save for the future.

If you start making payments on time and reduce your account balances, that should increase your credit score, and put you into a better position to get approved for a mortgage.

Incidentally, counseling agencies do not report to credit bureaus that you’re undergoing credit counseling or any other consumer education.

Debt Management Plans (DMPs) Can Hurt Credit

Many times, however, counseling services put their clients into debt management plans, or DMPs. This can be an appropriate tool for clearing your debts.

With a debt management plan, you make a single monthly payment to your counseling agency, which then distributes monthly amounts to your creditors.

Often, the agency gets the creditor to reduce your interest rate, and your payment. However, if you are making reduced payments, your creditors can report this to credit bureaus.

That usually takes points from your credit score. In addition, creditors can report that the account is in a DMP if they accept a reduced payment or make other concessions for you.

When you enter a DMP, you’re generally required to close the included accounts. This can harm your FICO.

Finally, know that you will be held responsible (and it will likely be reported on your credit history) if your DMP is late with its monthly payments to your creditors.

Before you commit to a DMP, ask your creditors how the account will be reported to credit bureaus, so you can make an informed decision.

You Can Buy A House While In Credit Counseling Or A DMP

How do mortgage lenders feel about DMPs?

If your credit score and payment history are in their wheelhouse, and your debt-to-income ratio is acceptable, most mortgage lenders don’t care if you’re in a plan or not.

Neither Fannie Mae nor Freddie Mac’s underwriting guidelines specifically mention credit counseling or DMPs for conforming loans.

Verify your new rate (Dec 13th, 2018)

Fannie, Freddie, And Your DMP

However, some conforming lenders have published their own guidelines online. In these documents, the term “debt management plan” is not used at all.

For loans underwritten with Fannie Mae’s Desktop Underwriter (DU) software, underwriters are instructed, “Regardless of DU Findings, the presence of consumer credit counseling service does not alter the underwriting recommendation.”

Freddie Mac lenders get similar guidance:

“Participation in credit counseling or completion of the same should not be the single determining factor in the credit decision.

If a valid credit score is obtained and the credit history meets all the requirements of the individual loan program, no further credit evaluation is required.”

However, if your loan is underwritten manually, by humans, the decision may be different.

Underwriters are required to use their best judgement, and opinions can vary.

In addition, conforming mortgage lenders are permitted to “overlay” stricter requirements than agency minimums.

FHA Home Loans

FHA mortgage guidelines do mention consumer credit counseling payment plans, and it’s okay to be in one and get a home loan if:

  • You are at least 12 months into the plan;
  • You’ve made all required payments in full and on time; and
  • You have written permission from the counseling agency.

This is nearly identical to the FHA stance on Chapter 13 bankruptcies, which are actually court-ordered debt management plans.

Alternatives To DMPs

If you want to consolidate debt and pay it off, you can do it outside of a debt management plan. This can help you keep your FICO score higher, and make mortgage approval more likely.

For example, if you consolidate your credit card debt with a fixed personal loan, your utilization ratio and credit score usually improves.

If you own property with some equity, a second mortgage or home equity line of credit (HELOC) can reduce your monthly payments and interest rate.

Chapter 13

Even a Chapter 13 bankruptcy might be better than a standard DMP.

First, all creditors are required to participate. Second, the Court determines a payment that you can afford.

If you make all payments in the plan over a (usually) five-year period, you can emerge debt-free. Any remaining balances are written off.

Finally, interest on accounts does not continue to pile up during your repayment. Even if the immediate effects of filing are harsh, in the long run, bankruptcy might be the better solution.

You can be approved for an FHA home loan after 12 months of on-time payments in your bankruptcy plan, if you get approval from the Court or Trustee.

What Are Today’s Mortgage Rates?

Conforming mortgage rates depend a lot on your credit score. Credit counseling and / or debt management plans can cause that score to increase or decrease. Check with several mortgage lenders and ask about their pricing and guidelines when you buy a house while in credit counseling.

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