I'm two payments away from being debt free and I used Freedom Debt Relief to get there but now what do I do to repair my credit. I started the program in 2009 settling and paying off $41000.00 of divorce debt and credit cards. I'm now newly remarried with a child and one on the way and have just been offered a new teaching position and we really want to buy a house so what is next?
Thank you for your question about rebuilding credit after debt settlement.
Congratulations for signing up with Freedom Debt Relief and sticking with the debt settlement program. It is good to see that you were able to set your goals and meet them. Now, you are ready for your next goals: rebuilding your credit after debt settlement and buying a house.
In order to buy a house and qualify a mortgage loan, your lender will look closely at three factors, your credit history, credit score, and debt-to-income ratio.
Review these points to help you move from your present point of post-debt settlement, to your goal of buying a house and taking a mortgage:
The importance of making and maintaining a personal budget is obvious to anyone who went through a debt settlement program. Your budget is an important tool in rebuilding credit after debt settlement.
Leverage your experience, by making an effort to save money with the funds you have been using to make your debt payments. Your budget categorizes your monthly expenses allowing you to get a grip on your cash flow. Make sure that you track these financial ratios:
Subdivide your DTI ratio into two sub-categories for better tracking purposes:
- Front-end debt-to-income (DTI) ratio: This represents your monthly housing costs, which is either your rent or your mortgage costs (principal, interest, insurance, property tax) divided by your monthly gross income.
- Back-end DTI ratio: In addition to your front end expenses, include your monthly required payment for all other installment and revolving credit including credit cards, auto loans
Here are some rules of thumb for each ratio:
Debt settlement and credit are not a good mix. When you stopped making payments, you broke the first rule of maintaining a good credit score- making timely payments. In order to rebuild your credit, focus on improving your credit score and if possible, repairing your credit report.
By going through the debt settlement plan and erasing your debts, you have immediately improved your debt-to-income ratio.
Rebuilding your credit by improving your credit score is possible, but takes time. Use these tips based on the five components of the FICO score:
Rebuilding credit through credit repair is possible, but difficult. Your credit report includes positive and derogatory (or negative) trade lines. Derogatory accounts including late payments, foreclosures, public records, and collections remain on your credit report for 7 ½ years. (Chapter 7 bankruptcies remain for 10 years and tax liens don't have expiration dates). As these items age, their effect will lessen on your credit score.
Here are a few methods of improving your damaged credit report:
No matter which method you use, it will take time to repair your credit score and credit history. Monitor your credit report. You can get a free credit report every year from each of the credit reporting agencies (Equifax, TransUnion, and Experian) through annualcreditreport.com. Stagger your requests so that you get one each four months.
Rebuilding credit in order to buy a home is a good goal. Underwriting criteria differ from lender to lender and are constantly changing. In general, a conventional loan will require 20% down payment, to get a loan without private mortgage insurance.
You best option is to take a mortgage are a FHA loan, which has less credit requirements. Here are a few FHA guidelines that will help you prepare for a loan:
If you cannot wait, then you can consider a loan on your spouse's name only. Your spouse will need to qualify for the loan based on their income and credit only. If you are considering a FHA loan, depending if the state is a community law state, your debt and income may also be considered. Read the Bills.com article about applying for a mortgage when spouse has bad credit.
Making the decision to go through debt settlement with Freedom Debt Relief was not an easy decision. Making it through the program took perseverance, good budgeting, and the ability to make it deal with stressful situations.
Rebuilding credit takes time and patience. Remember to follow these points: