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Rebuilding Credit and Buying a House

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?

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Rebuilding Credit

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

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 a 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, include 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)
Quick tip #1
Make sure that you are saving money. Create a rainy day emergency fund to cover 6 months of expenses. Also, create a down payment saving plan. Use Bills.com Saving Machine to get more ideas on how to save money.

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 a 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 each four months.

Quick tip #2
Get a credit report with your score, for a free trial period. Only sign up for the program if it is critical to follow your score.

Buy a Home - Take a Mortgage

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:

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

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

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:

  • Make your payments on time.
  • Don't take credit you can't afford.
  • Save money for a rainy day fund.
  • Save money for your down payment.
  • Monitor your credit report.
quick tip #3: ready for a loan? get a mortgage quote for a fha or a conventional purchase mortgage through one of bills.com participating lender.

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

Best,

Bill

Bills.com

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28 Comments

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  • 35x35
    Jun, 2019

    I have 45 hard inquires and 4 collection's and other late payments including 5 credit cards maxed out I couldn’t get approved for a loan.  What do I do?

    0 Votes

    • 35x35
      Jun, 2019
      Daniel

      45 hard inquiries??? The first thing you need to do is to stop applying for credit that results in you getting turned down. You're hurting your score by this hugely excessive number of applications.  There are no short cuts. Pay all your debts on time. After not applying for ANY credit for a year, aplly for a credit card marketing to people with bad credit.  Build from there. In 2 to 2.5 years, you can have excellent credit.

      0 Votes

  • 35x35
    Jun, 2019

    I see that my story is similar to a number of other people who commented on this page recently. We are all victims of scammers who claim they can "hack" the system and improve your credit score.

    The guy who ripped me off was Deric Scott and his email started off DericRepair101@. I don't want to put the rest of hius email address in because I don't want him to rip-off anyone else.. He said that he can h increase my credit score from 480 to 785 within 48 hours. I paid him "half" the fee up-front. I was supposed to pay the other half after I could see that my scores rose. He took my money, did nothing, and stopped answering my emails once he got my payment.

    0 Votes

  • 35x35
    Jun, 2019

    I have one credit card that I pay off every month and never charge more than 20 percent of its limit. My house, vehicle, etc. are all paid for. I spend very little as I need little. I have been frugal all my life and now I find a credit score of 500. I don’t owe a soul and I’m very careful with my money. I just don’t understand what is causing my credit score to suffer.

    0 Votes

  • 35x35
    Jun, 2019

    I was planning on securing a loan to get a house. I read blogs and post of how hackers helped people who were in need of removing negative listings on their credit report and payment history which accumulated, I was just heading off foreclosure, it would be very difficult for me to get a good credit rating let alone own a house. then I was introduced to a "FICO specialist" in an online hacking firm –TRUST REPAIR.

    I was skeptical at first, but they had what sounded like a good answer to every question I asked.

    I wish I had listened to my gut reaction. Instead, I fell for their scam. I paid them and got nothing but ripped off.

    0 Votes

  • 35x35
    Jun, 2019

    My name is Belinda. I wanted a bigger space for my kids to live comfortably as they grow older. I had to work really hard for this course. My credit score was 701 so I thought I stand a chance of getting a loan for my new home. While seeking for a loan, I realized my report isn't in a good shape. I had some negative items preventing me from getting the loan I seek. I looked for means to clean up this mess so I could possibly get the house I required.

    I got a recommendation on Trust Repair from a friend. They took my money and did nothing to help me. I guess they don't rip everyone off, as my friend recommended them to me. But, for me, it was a total rip-off.

    0 Votes

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