How Long After Debt Settlement Can I Buy a House?

Entering a debt settlement program doesn’t have to dash your hopes of someday buying a home. If getting a place of your own is part of your long-term dream, this step could actually help move you closer to that goal. 

For one thing, getting rid of old debt could lower your debt-to-income (DTI) ratio—a vital factor in mortgage applications. It could also make it a lot easier to rebuild your credit without unmanageable debt holding you back.

It's not an instant fix, though. Some lenders might approve a mortgage application shortly after you finish debt settlement, but many more will want to see your credit scores improve first. You could be ready to apply for a mortgage in as little as two years depending on your overall qualifications, though it may be four years or more in some cases. 

Here, we walk you through how to gauge your own timeline from debt settlement to home ownership.

Your Credit Scores Can Drop During Debt Settlement

In debt settlement, you—or a debt relief company working on your behalf—negotiate with your creditors to accept less than you owe and forgive the rest of your debt. Those accounts are often marked as settled or settled for less on your credit reports.

Many people who seek out debt relief are already behind on payments; even if they're not behind yet, most choose to stop paying their creditors while they save up for settlement. This frees up more money to save, plus it signals to your creditors that you're having trouble affording your debts.

Missed payments can do a lot of damage to your credit scores. That's where most of the credit damage associated with debt settlement originates. Late payments can stay on your credit reports for up to seven years. Even after settlement, an account marked settled is less favorable than one marked paid in full.

All of this means your credit score is likely to need some work when you finish a debt settlement program. This is especially true if your goal is to get a mortgage loan, as they often have minimum credit score requirements.

You Can Start Rebuilding Credit Right Away

The good news is that credit is very changeable. You could start rebuilding your credit the day your debts are settled. And it will probably be a lot easier to do without all that unmanageable debt hanging over your head.

Your credit score should improve over time if you focus on:

• Making all your bill payments in full and on time 

• Avoiding taking on new debt 

If you’re serious about repairing your credit score, you can typically do it within one to two years, though it may take longer depending on your situation. 

The credit score you’re aiming for depends on the type of mortgage loan you want. For example:

Debt Settlement Could Actually Help Your DTI

Lenders don't just focus on your credit score when it comes to mortgage loans. They'll also look at your existing debt levels—and whether they think you can afford more debt.

That's where your debt-to-income ratio (DTI) comes in—a comparison of your monthly income before taxes and your debts. Since debt settlement could help you get rid of your unsecured debts, finishing a settlement program could actually improve your DTI.

The DTI you're aiming for may vary based on the type of mortgage you need:

Individual lenders may have their own internal DTI requirements, so it's good to ask if you're not sure.

Some Lenders May Have Specific Waiting Periods

Debt settlement isn't taken lightly by lenders, as it shows you weren't able to repay your loan in full. Some lenders may have specific policies that require a waiting period after debt settlement before you can qualify for a mortgage loan.

Government-backed mortgages, like FHA or USDA loans, may be more flexible on waiting times after debt settlement. Lenders offering conventional mortgages often have minimum waiting periods of two to four years after you finalize a debt settlement before they'll approve a mortgage application.

What You Can Do While You Wait

The better prepared you are for homeownership, the better your odds of loan approval. As you wait on your credit to improve and lender waiting periods to pass, you can use your time in several good ways.

Keep an eye on your credit reports and scores

If the idea of regularly ordering a copy of your credit report seems silly, consider this: Approximately 44% of all credit reports contain at least one mistake, and even one mistake can prevent you from getting loan approval.

By visiting AnnualCreditReport.com, you can order free copies of your report from Equifax, Experian, and TransUnion—the three largest U.S. credit reporting agencies. Don’t be surprised if they’re different from each other, since different lenders report to different agencies.

Go through each report, looking for anything that’s not right—anything from an incorrect address to a loan or a debt that’s not yours. Circle any mistakes you find and report them to the credit bureau in question. For example, if you find an error on a TransUnion report, dispute it through TransUnion.

Not only can you make sure your reports are accurate, but this will help you keep an eye on your credit progress as you work on rebuilding a positive credit history.

Save up your down payment

The size of your down payment can have a big impact on your mortgage loan approval. A larger down payment is often a good way to offset a slightly lower credit score.

Conventional loans generally require 20% down if you want to avoid private mortgage insurance (PMI), but VA and FHA loans may require a lower or no down payment. That said, when you make a larger down payment, the lender views you as having more skin in the game, which reduces the risk associated with approving your mortgage.

A larger down payment could be a help, but it’s not the only thing you should save for. Homeownership can be more expensive than you expect. You just went through a lot to get rid of your debt—now isn't the time to repeat past mistakes.

Think of the time between debt settlement and buying a home as some welcome breathing space that allows you to better prepare financially. Save up, rebuild credit, and get ready for the next chapter.