You’ve dreamed of owning a home and finally have enough saved for a down payment. But you worry you won’t get approved because you recently completed a debt management plan (DMP). Or maybe you haven’t yet completed a DMP but have been enrolled for a bit and aren’t quite sure of your approval odds.
Read on to learn more about how debt management programs work, how they may affect a mortgage application and if they diminish the likelihood of getting a home loan or refinancing your existing mortgage.
What Is a Debt Management Plan (DMP)?
A debt management plan (DMP) is a form of debt relief that can help you resolve overwhelming unsecured debt balances. It’s a feasible alternative to debt settlement or bankruptcy, and you could get out of debt in just three to five years.
DMPs are offered by nonprofit credit counseling agencies and entail consolidating your monthly payments and securing concessions from creditors to eliminate the principal balance on your debts. Before enrolling, you’ll consult with a certified credit counselor to assess your financial situation. They will devise a plan of action to help you manage your money more effectively. The counselor will also review the proposed payment plan during the initial session.
If you agree, the agency will begin reaching out to your creditors to notify them of your enrollment and secure concessions that make it easier to pay off the balances faster. These include reducing the interest rate, re-aging the accounts to bring them current and waiving late fees. Most creditors will also close your cards upon notification of your enrollment in a DMP.
The final step is for you to begin making the agreed-upon monthly payment to the credit counseling agency. It’s vital that you stay current as the funds are divided up and sent to your creditors each month to uphold the terms of the agreement. You’ll continue to make monthly payments until all your balances are paid off.
Be mindful that your monthly payment amount won’t change as you pay off debt. Instead, the credit counseling agency will increase the monthly payments to the remaining creditors.
How a Debt Management Plan May Affect a Mortgage
A DMP could impact your approval odds for a mortgage.
Does a Debt Management Plan Affect Your Current Mortgage?
If you decide to enroll in a DMP, it won’t affect your current mortgage. Also, keep in mind that DMPs only cover unsecured debts. So, mortgages and other debts secured by collateral aren’t eligible for inclusion in a plan. Student loans also can’t be included in DMPs.
Can You Get a Mortgage After a Debt Management Plan?
Mortgage lenders have guidelines regarding credit scores applicants need to get approved. If your median credit score, or the average of your score from the three credit bureaus – is up to par, you could get approved for a home loan. And completing a DMP could boost your chances even more as you’ll likely have a lower debt-to-income ratio and may have a stronger credit score.
Can You Get a Mortgage While in a Debt Management Plan?
Some lenders could approve you for a conventional mortgage while in a DMP if you have a high enough credit score and acceptable debt-to-income (DTI) ratio. But if your credit score is a bit low or your DTI is on the higher end, the lender may charge a higher interest rate to offset the level of risk you pose as a prospective homebuyer. And your loan application could also be subject to a manual underwrite, which requires that the underwriter reviewing your application use their best judgment to make a lending decision.
If you’re applying for a Federal Housing Administration (FHA) loan, you’ll need to be in the plan for at least 12 months and make timely payments to qualify. The lender will also request written permission from the credit counseling agency managing the DMP to secure a mortgage.
Wait for a year or more after enrolling in a DMP to apply for a mortgage. This gives you enough time to reduce your debt and improve your credit.
When you are ready to apply, connect with a mortgage broker to assist you. They can shop your information around to lenders in their network to secure the best deal. You can also use a mortgage marketplace to gauge your approval odds and potential loan terms. Plus, some online marketplaces can pre-qualify you with a soft credit pull that won’t impact your score.
Can You Refinance Your Mortgage After a Debt Management Plan?
It’s possible to refinance your mortgage after a DMP if your median credit score meets the lender’s minimum threshold for approval. You should also have an acceptable debt-to-income ratio, a steady source of income and meet the lender’s additional qualification criteria.
Can You Refinance Your Mortgage While in a Debt Management Plan?
A DMP won’t typically disqualify you from refinancing your mortgage. Like home loans, lenders also have qualification criteria regarding credit scores and DTIs that you must meet to be eligible for funding.
