Can You Get A Mortgage While In Credit Counseling?

Your credit score is one of the biggest determiners of whether you’re eligible for a mortgage, as well as your mortgage rate. If your credit needs work, credit counseling might help. Here’s how mortgage credit counseling works and why it might impact your odds of getting approved for a loan.

Credit counseling vs. debt management for a mortgage

Credit counseling is not the same as. debt management or debt relief or settlement. Counseling is simply advice — think of it almost like a consultation with a therapist. You don’t have to adhere to the counselor’s guidance, but they can help you understand financial pitfalls and suggest steps to rectify them.

Depending on the counseling provider, you might be able to turn that initial session into a debt management or relief plan — or, you might contact a different debt management company for help. If you choose this route, the organization will help you settle your debts, typically for a fee. Generally, these plans last for up to five years.

“Typically, fewer than half of the people who call for credit counseling actually enroll in a debt management plan,” says Michael Sullivan, director of Education at Take Charge America, a nonprofit financial counseling agency. “Many do not qualify because their debt is manageable or because their debt is beyond benefiting from a debt management plan.”

Credit counseling doesn’t automatically preclude you from getting a mortgage. It’s also entirely optional. There are many ways to improve credit for a mortgage on your own, including paying bills on time and reducing your credit utilization.

A debt management or relief plan, however, can hurt your credit, says Jeremy Davis, president of Mortgage at Southern Bancorp.

“Beware of companies promising quick fixes or outright forgiveness of your debt,” Davis says. “If your debts are being forgiven, your credit is likely taking a negative hit, and you could owe taxes to the IRS for any debt forgiven.”

If you’re interested in credit counseling, you can find providers through the National Foundation for Credit Counseling, the Financial Counseling Association of America or the U.S. Department of Housing and Urban Development.

Can you buy a house while in credit counseling?

It’s possible to get a mortgage and buy a house while working with a credit counselor, but expect more scrutiny, says Mosi Gatling, senior vice president of Strategic Growth and Expansion at New American Funding.

“Some lenders may require you to have made a certain number of on-time payments, typically 12 months, before considering your mortgage application,” Gatling says. “It’s all about showing consistency, stability and a clear path forward.”

Consider the type of mortgage, as well. If you’re looking at an FHA loan, for instance, your counselor needs to provide written permission for you to apply.

“Conventional loans tend to be stricter,” Gatling says, “especially if you’re in a formal debt management plan.”

Ultimately, Davis says there’s “no cookie-cutter solution” for borrowers in credit counseling.

“Be sure to seek the advice of an experienced mortgage lender who understands credit challenges,” Davis says.

Do mortgage lenders offer credit counseling?

Most mortgage lenders aren’t in the business of credit counseling, but there are exceptions. Veterans United Home Loans, for example, offers credit “consulting” services that can help borrowers establish a credit profile to put them in a position for a mortgage. Some credit unions connect borrowers with counselors, too, although the services might not be directly affiliated with the institution.

Credit and debt requirements for a mortgage

Whether you’re in credit counseling or not, you’ll need to meet minimum credit score and debt-to-income (DTI) ratio requirements for a mortgage. Here’s an overview:

FAQ

• Does credit counseling include homebuyer education?
  

  No. A homebuyer education course is often a requirement for first-time homebuyer loans. It offers a basic overview of the homebuying process and typically takes only a few hours. The class doesn’t usually cost money and can be completed in-person or online.