Real Estate & Personal Finance: Can I Buy a Home While on a Debt Management Plan?



What Are Debt Management Plans?

Securing a new mortgage loan might be difficult, but not impossible.

A debt management plan helps you get your personal finances under control through a carefully structured action plan based on your income, assets and liabilities. If you're considering a debt management plan or if you're already enrolled in one, chances are you've found yourself in a challenging situation regarding your expenses and you're looking for a solution to overwhelming debt.

 

How Debt Management Plans Work

To create a DMP, you and your credit counselor review your income, unsecured debt, such as credit cards, unpaid hospital bills and student loans. In addition, the counselor looks at your household expenses such as rent or mortgage payments, utilities, food and your typical costs for transportation, clothing and personal care. You calculate your income, deduct your liabilities and look at what you have remaining to pay down your unsecured debt. The counselor estimates what the monthly cost would be to pay down your debt through a DMP over the course of what's usually three to five years. The benefit of using a credit counselor is that she can usually negotiate lower interest rates and reduced fees to help you on the path to restoring your financial status.

For example, if your monthly income is $2,500 and your housing and personal expenses total $1,000 a month, you have $1,500 to put toward your debt. If your credit counselor can negotiate a monthly payment for the total of your unsecured debts that's less than $1,500, you could have a surplus. It's possible that your surplus could go toward buying a home, but two people you should talk to first are your credit counselor and your mortgage lender.

Re-establishing Your Financial Standing

When you enroll in the DMP, you agree to make monthly payments to the credit counselor's agency, which will then disburse money to your creditors who have agreed to the consolidation plan. To fulfill your obligation, you must make your monthly payments on time for the specified period. For example, the DMP based on your personal and financial circumstances could be $800 per month for two and a half years. The goal of a DMP is to resolve your debt so you can move forward with the rest of your financial dreams, but if you can't wait almost three years to buy a home, be aware that you won't qualify for a conventional loan, says Wright.

DMPs and Mortgage Loans

Wright provides an easy-to-understand reason why it's difficult to get a traditional mortgage loan while you're on a DMP. A traditional mortgage is one that's guaranteed by the U.S. Federal Housing Administration or the U.S. Department of Veterans Affairs, as well as a loan obtained through Freddie Mac or Fannie Mae. "A debt management plan is virtually the same as a Chapter 13 bankruptcy. The difference between the two is that a Chapter 13 bankruptcy takes effect based on the bankruptcy court judge's order and a debt management plan is an agreement negotiated by the credit counselor between the consumer and the creditor," says Wright. If you were to file a Chapter 13 bankruptcy, you wouldn't qualify for a conventional mortgage through Freddie Mac or Fannie Mae for up to four years after the bankruptcy is discharged, but you might qualify for a loan guaranteed by the FHA after one year.

Alternatives to Traditional Home Loans

You might not get a traditional mortgage loan while you're on a DMP, but you might have some alternatives to consider. "The alternative to a traditional mortgage loan is an owner-financed home purchase because the qualifications may be less stringent. To obtain an owner-financed home, you'll need to convince the owner of the home for sale to finance your purchase," says Wright.

Another slim chance at buying a home is a contract-for-deed. These arrangements often were referred to as "lease-to-own" or "lease-purchase" according to Wright. But they may contain overly restrictive contract terms that consumers agree to because their credit ratings or financial circumstances won't permit them to get traditional mortgages. The other alternative is to simply wait until you've resolved your debt through the DMP and begin your new chapter in financial stability with a mortgage loan you may qualify for without looking for a workaround.

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