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Rebuild Credit After Debt Settlement to Buy a Home

How can I rebuild my credit and buy a house after completing debt settlement?

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:

  • Maintain a budget
  • Rebuilding credit
  • Buy a home - Take a mortgage

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Rebuilding Credit
In this article:
  • Even when your credit has taken a severe hit, taking the right steps will lead to excellent credit within two years.
  • Establish new accounts. Pay on time. Keep balances to 10% or less of your account limit.
  • In addition, improve your DTI and save money for a downpayment.

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:

  • Maintain a budget
  • Rebuilding credit
  • Buy a home - Take a mortgage
Avoid Simple Mistakes that Harm Your Credit

Call 800-998-7497 to speak with a Money Coach and set up a plan to build your credit score and learn how to avoid common errors that will prevent you from achieving excellent credit.

Maintain a Budget

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:

  1. Debt-to-Income (DTI) ratio: Your debt-to-income ratio is calculated by dividing your monthly debt payments by your gross monthly income. The expenses that are used include your rent (or mortgage, property taxes, and insurance payments), auto loans or lease, revolving and installment credit, and payments resulting from legal liability, such as child support, alimony, and tax payments.

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, including your monthly required payment for all other installment and revolving credit including credit cards, auto loans
  1. Savings-to-Income ratio: Divide your monthly savings- including retirement, investment, and regular savings plans- by your gross income.
  2. Monthly Cash Flow: Divide your monthly expenses by your gross income.

Here are some rules of thumb for each ratio:

  • Front-end DTI: 31%
  • DTI: 44%
  • Savings: 10%
  • Monthly cash flow: 100% (if more, then you are running a deficit)
Calculate Your DTI

Calculate your DTI with the Bills.com Debt-to-Income Calculator

Rebuilding Credit

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:

  1. Timely payments: Make all your payments on time.
  2. Credit Utilization: When you get a credit card, pay it off each month in order to maintain good credit utilization.
  3. Length of credit history: Keep your cards active.
  4. New Credit and Credit Mix: Take out a secured credit card. If your wife has a credit card, then become an authorized user. Take out an auto loan or small installment loan. Make sure you can afford the payments. If your wife has good credit, then use her as a co-borrower.

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:

  1. Do It Yourself: If your settlements are not reported correctly send letters to the collection agency asking for a correction to their report. Instead of reporting the item as charge off, they can change it to settled charge off.
  2. Credit Repair agency: Speak to a credit repair agency to dispute items on your credit report. Remember, there is no guarantee that they can remove items that are correctly reported. However, sometimes an original creditor will not respond to dispute letters and the credit reporting agency will remove the item. (It could be reinstated). Read the Bills.com article Lexington Law review for more information about credit repair.

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 every four months.

Buy a Home - Take a Mortgage

Rebuilding credit to buy a home is a good goal. Underwriting criteria differ from lender to lender and are continually changing. In general, a conventional loan will require 20% down payment, to get a loan without private mortgage insurance.

Your best option is to take a mortgage are an FHA loan, which has less stringent credit requirements. Here are a few FHA guidelines that will help you prepare for a loan:

  • Down payment: 3.5%
  • DTI ratio: 43% and a front end DTI of 31%
  • FICO score: 580, although lenders may require higher.

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 an FHA loan, depending on 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.

Rebuilding Credit and Buying a Home After Debt Settlement - It's Not a Dream

Deciding to go through debt settlement with Freedom Debt Relief was not an easy decision. Making it through the program took perseverance, proper budgeting, and the ability to make it deal with stressful situations.

Rebuilding credit takes time and patience. Remember to follow these points:

  • Make your payments on time.
  • Don't take loans or credit you can't afford.
  • Save money for a rainy day fund.
  • Save money for your down payment.
  • Monitor your credit report.
Comparison Shop to Find the Best Loan

Ready for a loan? Get a mortgage quote for an FHA or a conventional purchase mortgage through one of bills.com's participating lender.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

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  • 35x35
    Caro Emmrich,
    Feb, 2020

    My husband is originally from Canada and when he moved to US he never had a credit score done. He never even had a credit card in his life. We could not put his name on our new car loan because he had no credit history and as loan manager explained to us that can increase the interest rate on the loan. I added my husband to my credit card so he can build his credit history (he could not get approved for Wal-Mart credit card by himself). So few months after, my husband blames me for his score low because I do have lots of debt. Although it is true I do have mortgage, home equity loan, credit card debt, school loans, and now car payment. I need help fixing my credit profile so my husband can get a good score. 

    • 35x35
      Daniel,
      Feb, 2020

      The good news is that you have established a lot of credit. You are not penalized for the balance on your mortgage and home equity loan, though if you applied for them recently there would have been a small hit. You benefit from having such a wide variety of types of credit.

      The key for you to build stronger credit from which you and your husband can benefit is to:

      • Pay all of your bills on time and certainly avoid a 30-day late payment that would lower your score.
      • Lower your credit utilization on your credit card debt. The balance reported to the credit bureuas by your credit card issuers is the one on your monthly statement. That means you want to pay your credit card bills down to 10% or less of the credit balance before the statement is cut. That way, the lower balance is reported, your credit utilization improved, and your score will rise. 
  • 35x35
    cindy,
    Jan, 2020

    I also fell for the scam that I could have items on my credit report deleted by the hacker Perfectsmart. Wish I could see these rip-off artists face justice.

  • 35x35
    Austin,
    Jan, 2020

    PERFECTSMART is another scam artist that claims it can "hack" your credit report to get rid of all the bad items and boost your score. Stay away or get ripped off!

  • 35x35
    Elan Dohasan,
    Dec, 2019

    Warning: stay away from "hackers" who say they can boost your score. They are rip-offs and scammers. I was lied to by a hacking firm known as GHOSTVIRUS.  

  • 35x35
    Buck,
    Nov, 2019

    I'm tired of seeing people hugely ripped off when they are out online seeking real help to deal with their financial problems. All These scam hackers tell you that they will fix your credit, they make very big promises to get you to sign their contract. You pay the monthly payments and getting nothing in return. I used them for about a year and my credit scores actually went down. We had a very sick child and had a lot of medical collections and because they inquired about those to try and dispute them it basically quote refreshed the debt thus making our scores lower. We were young and dumb back then. Tom Hacker, of HackersDreamElite, scammed us.

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