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Debt settlement is a tried and tested way of getting out of a tough credit situation. This type of debt solution allows you to pay off your debt despite limited finances. Although some people call this a questionable debt relief program, you cannot ignore the fact that it has successfully gotten people out of debt. This is especially true for those who are struggling with the high-interest credit card debt.
Sometimes, people rack up too much credit card debt and end up not being able to pay for it.
According to CreditCards.com, 13.6% of consumers have debts in collections. This means a specific amount of time had passed after the last time that they paid their dues.
There are so many reasons why people end up with their accounts in collection. Sometimes, a member of the family gets sick and the funds that should have been used to pay off the debt had to be spent on medical treatments. There are times when the credit card holder loses their job and suddenly does not have the funds to pay it back. These reasons show that there are moments beyond our control that leaves us unable to meet our credit obligations. When you fail to pay your debts, your account goes into default, when it does, the debt collector starts to call you to force you into paying your dues.
When your debt goes into collection, things usually turn for the worse. This is when you need to act quickly to find a debt solution that will help you pay off your dues despite your limited financial resources.
If your loan is in default, debt settlement is usually one of the best options that you have. The great thing about this option is its ability to reduce what you owe. This debt relief program involves negotiating with your creditors so they will allow you to pay only a portion of what you owe and have the rest forgiven. You will tell them that you cannot afford to continue with your old payment terms because of circumstances that are beyond your control. Usually, creditors agree to settle with you just so they can avoid bankruptcy. If you declare yourself bankrupt, there is a chance that they will not get anything.
In the event that your debt settlement is successful, how do you think that would affect your future financial transactions? For instance, will you be able to buy a house so you can increase your personal net worth? Or will the debt relief program hinder you from buying a house and keep you renting for the rest of your life?
What happens after you settle your debts?
The truth is, settling your debts will have an effect on your chances of becoming a homeowner. But that is only temporary. Debt settlement may compromise your ability to buy a house but that does not mean it is not a good idea. If you cannot pay off your debts for now, you really cannot buy a house just yet. You need to solve your debt situation quickly before you can invest in your own house. That is something that debt settlement can do for you.
But once you have settled your debts, what happens now?
There are two things that will happen after you settle your debts.
You have less debt to your name.
The first is having less debt. Although you only paid for a portion of your debts, the creditor agreed to forgive the amount – as long as you completed the settlement amount. This means your balance should be significantly lower now. If you settled all of your credit accounts, your balance should now be zero.
Your credit score is probably low.
The other thing that will be evident after debt settlement is that fact that your credit score is now lower than before. Most of the time, creditors will not settle with you until your loan is already in default status or in collections. That means you had gone a few months without paying your loans. Late payments can lower your credit score significantly. Although your debt is already gone, your credit score will still need some work.
Of the two effects of settling your debts, the latter is the one that will compromise your ability to buy a house. This should not be a problem because you can always rebuild your credit after debt settlement. It is not an impossible task to do.
But before you concentrate on fixing your finances so you can buy a house, there are three things that you need to do first. These will help ensure that the debt relief program that you used will not backfire on you.
- Get a copy of the settlement agreement. First of all, get a copy of the settlement agreement. This copy should have an authorized signature from the creditor. Once you have this document, keep it in a safe place. This document will help prove that you no longer owe anything to this creditor. Sometimes, creditors come back to collect the debt that was supposed to be forgiven. The settlement agreement will help prove that you should owe nothing anymore.
- Make sure the settlement payment is credited to your debt. After paying the settlement amount, check your account to make sure that it is credited to your debt. Call them and have them send you a document that the settled debt already has a zero balance.
- Check your credit report to ensure that your debt is settled. Finally, check your credit report. Wait a couple of weeks before you do this so the creditor has time to report it to the credit bureaus. After some time, get a copy of your credit report and see if the settled debt is marked accordingly.
Once you have completed all these tasks, you can now focus on making the preparations that will allow you to buy your own house.
How to qualify for a home loan after debt settlement
There are many ways that you can improve your finances so you can qualify for a home loan after you go through debt settlement. You simply have to improve your credit score.
As mentioned earlier, it is your damaged credit score that will compromise your ability to own a house. You need to work on building you score so you will get a good deal on the home loan that you will borrow. Based on the information from FHA.com, you can only qualify for a home loan from the Federal Housing Administration if you have a score of at least 580 (FICO score). This will allow you to get a home loan and make you eligible to pay only 3.5% on your down payment. Otherwise, you have to pay 10% on your down payment.
There are various ways that you can improve your credit score. If you have other debts, you can pay them off on time so you can show that you are a responsible credit borrower. You can also use your credit card for small purchases and then pay off the balance in full when the billing statement arrives. All of these efforts will take a bit of time because building up your credit score will not happen overnight.
While you are rebuilding your credit score after debt settlement, you can work on other things that will help improve your finances in time for your home buying intentions. Here are a couple of things that you need to work on.
- Save up for a down payment. Start by saving money for your down payment. The bigger the amount that you put towards your down payment, less you have to borrow. It also means you get to own more of the equity in your property.
- Stop adding to your debt. While using your credit card will help you improve your credit score, that does not mean you have to be in debt. You can use your card but you have to pay it off immediately. Do not let your debt accumulate once more. According to Time.com, debt levels have steadily risen in the American household. The revolving balance of consumers is currently at $15,355. The home loan will already be a big amount to owe. Do not add more to what you intend to borrow when you buy your house.
- Diversify your income. Another thing that you need to do is to diversify your income. Open other streams of income so you can stabilize your financial position. In case one income source is compromised, you do not have to worry about your finances. You have other sources that will give you the money that you will need to pay off your basic needs and debts.
In the end, your dream of buying your own house does not have to be hindered by debt settlement. What is more important is lowering your debt levels regardless if your credit score will go down. You can always rebuild it before you buy your dream home.
