Owning a home became the American Dream in the middle of the 20th century.
Now debt has become the American alarm clock, rudely waking people up to the reality of the 21st century.
Home ownership in America fell to 62.9% in the second quarter of 2016. That was a 50-year low as the economy struggled to recover from the Great Recession.
U.S. household debt also climbed to $12.25 trillion. All those numbers add up to a catch-22 for many Americans who dream of owning a home but struggle to keep up with their household debt.
One of the most reliable ways out of debt is through a nonprofit debt management program. But being in a debt management program makes financial institutions less likely to loan you money for a home.
The answer is yes, though you must first realize the real problem isn’t the debt management program. It’s the behavior that got you into a debt relief program in the first place.
The specifics differ from person to person, but the basics are they spend more than they earn. The accrued debt, usually in the form of credit cards, acts like quicksand. The harder people try to escape, the deeper they sink — and the more the American Dream gets swallowed.
If you decide you want to buy a home, a lender is not going to automatically say, “This poor sap is on a debt management program, so they can forget about getting a dime from us.” Mortgage lenders check your income, employment history and credit report, which is based on five factors: Payment history (35%), amount owed (30%), length of credit history (15%), inquiries for new credit (10%) and credit mix (10%).
All those factors produce your credit score, which typically improves while on a debt management plan. A good one shows you have financial habits that make you worthy of a loan. The hitch is that a five-year repayment process doesn’t always move quickly enough for people wanting a new home today.
One problem is the down payment. The crazy days of “Zero money down!” that helped lead to the real estate crash of 2007 are gone. Now mortgage lenders typically require a down payment of 5% to 20%. That can add up to tens of thousands of dollars, which begs the question: should you use your extra money to pay off debt or save for a down payment?
It’s likely that if you have that kind of cash lying around, you’d put it toward paying off your debts.
Mortgage lenders also check a pesky thing known as debt-to-income ratio (DTI). It’s a simple formula that takes your monthly expenses and divides them by your monthly income.
For instance, if your monthly bills are $3,000 and your income is $6,000, your DTI is 50%. Traditional mortgage lenders like banks prefer it to be 40% or lower.
Your chances at succeeding as a homeowner are significantly improved at lower debt-to-income ratios. Additionally, you’ll be approved for more money and a lower interest rate by making yourself a more attractive borrower. Be prudent and pay off your credit card debt before taking on the often costly responsibility of home ownership.
If your income grows and you are able to cut your expenses, you could accelerate your credit card debt payments and be ready for a home sooner. In fact, many people make saving for a down payment their first financial goal after completing a debt management program.
Completing a debt management program and becoming debt-free should improve your ability to qualify for a mortgage with good terms.
Three to five years of timely credit card payments, limiting new credit applications and paying your other bills as agreed should result in an optimum credit score at the end of your program.
If you are determined to purchase a home while on a debt management program and have been turned down by a traditional bank, there are other mortgage options.
Mortgage lenders like Quicken and LoanDepot have blossomed with the Internet and offer more flexible lending terms.
Mortgage marketplaces like LendingTree, Zillow and E-Loan take your application and present it to a roster of potential lenders. You can pursue one or more, and the marketplace site receives a flat fee for the lead.
There also is owner financing, where you make mortgage payments directly to the person you bought the house from. A seller might offer that if he or she has had trouble selling the property.
There are lease-to-own options, where you rent a property for a specified initial term with an option to buy it at the end of that period.
The mortgage options are out there if you are determined to pursue the American Dream. For millions, it became a reality, thanks largely to Presidents Calvin Coolidge and Franklin D. Roosevelt.
“No greater contribution could be made to the stability of the nation and the advancement of its ideals than to make it a nation of home-owning families,” said Coolidge, who was president from 1923–1929.
Roosevelt came along in 1933 and introduced federal backing of mortgages. That allowed financial institutions to significantly reduce down payments and interest rates they had to charge.
The GI Bill was also a boon to home ownership. Americans owning homes went from 43.6% in 1940 to 61.9% in 1960. Steady growth continued until 2004, when it peaked at 69.2%.
Then the housing bubble burst and nearly took the entire U.S. economy down with it. The recovery made renters out of millions who might otherwise have fulfilled Coolidge’s and Roosevelt’s grand vision.
Recapturing that starts with eliminating the behavior that causes debt. So while it’s tougher to get a mortgage when you’re in a DMP, the bottom line is that you may never get a mortgage without one.