Question: Hi, I am currently finishing a Debt Management Program I have been in for the last 3.5 years. We currently own an FHA-financed home and have used the DMP to manage some out-of-control credit cards and reduce our debt ratio.
We are now looking to sell our current home and make a large profit, which would also help eliminate any other debts. We would be looking to purchase a newer home, which would be easier now with no credit debt and a 20 percent down payment.
Would it likely hurt our chances of securing a new loan once the DMP is finished? Our credit is back into the 700-plus range, and we have a large down payment for a conventional home loan. Thanks so much.
— Jeff in Texas
Howard Dvorkin CPA answers…
In the world of personal finance, the answers to even the most basic questions can be complicated. Happily, this isn’t one of those times…
No, Jeff, successfully completing a DMP will in no way hurt your chances of securing a good mortgage!
Now let me explain why.
First, let’s review just what a debt management program does. Called a DMP for short, it significantly lowers your monthly payments. How? Well, you work with a nonprofit credit counseling agency that negotiates with your creditors. Very often, you pay 35 to 50 percent less, and all late fees and penalties stop.
Whenever I tell people this, they look at me skeptically and say, “Yeah right! Why would my creditors give me a break? This sounds too good to be true.”
Actually, it’s both good and true.
Think about it from your creditors’ point of view. They trust the nonprofit credit counseling agency because they’ve worked with them for years — in some cases, decades. They know you’re in trouble and might declare bankruptcy, which means they not only lose money, they lose a customer.
So these creditors allow you to pay back a percentage of what you owe over time. As with anything in life, there are drawbacks. As you can read in the Debt.com report Debt Management Program Pros and Cons, you can’t open a new credit card while you’re paying back your old ones. Also, at the beginning of the DMP, some people notice a small dip in their credit scores.
However, once you complete a DMP, you have nothing but clear skies and green pastures ahead of you. DMPs aren’t automatically reported to the Big Three credit bureaus (Equifax, Experian, and TransUnion), and eliminating your credit card debt improves your credit utilization ratio, which is 30 percent of your credit score. You also improve your payment history, which is another 35 percent.
DMPs resemble gym memberships: In the beginning, you’re working out hard but not seeing any results. Later on, however, you see big results and want to work out even harder. You’re at that point, Jeff. You’ve paid your dues — literally. Now you can buy your home and enjoy what financial freedom really means.
