Reduce debt and improve credit for better mortgage rates following these tips.
Many people who are overwhelmed by their debt turn to debt settlement services providers to negotiates with creditors to reduce the amount of unsecured debt they owe. Debt relief companies cannot help clients with debt that involves collateral, such as a mortgage or car loan. It also cannot address debt from federal student loans. So if those are your primary debts, those companies aren't the answer for you.
Also, there are risks and drawbacks associated with debt settlement. Your credit scores will take a significant hit, potentially affecting future applications for credit and even employment. Some creditors may sell your debt to a third-party collection agency or debt buyer. When you stop paying your accounts while working with a debt settlement company, you may experience aggressive collection attempts or even lawsuits from your creditors. Because the IRS considers forgiven debt as taxable income, it’s possible you’ll owe taxes on the amount of debt you no longer had to pay after settling.
If it sounds too good to be true, there's probably a catch.
Here are other options:
Debt management plan
This may be a better option for someone who has a steady income to repay credit card debts within three to five years. You’ll pay a nonprofit credit counseling agency to consolidate your debts into one monthly payment at a reduced interest rate. But you won’t have access to new credit or be able to use your credit cards during the payoff period.
With this option, you’ll transfer multiple debts into one new debt, usually via a balance transfer credit card or a debt consolidation loan. The new debt should carry a lower interest rate than your old debts, potentially helping you pay off your debt faster. But it often requires good to excellent credit to qualify or to get good terms.
Bankruptcy can resolve your debt under protection from a federal court. Chapter 7 bankruptcy will typically erase most unsecured debts in three to six months, but not everyone qualifies. If you’re delinquent on debt, filing for bankruptcy will stop calls from collectors and lawsuits against you. Your credit will take a hit, as with debt settlement, but research shows credit scores tend to rebound within a year.
DIY debt settlement
You can pick up the phone, call your creditors and negotiate with them yourself. As with using a debt settlement company, success isn't guaranteed, but it could save you time and money.
Once you have your debts under control, you will have more mortgage options. Let's chat and make a timeline and game plan to get you to your dream home!