Can You Refinance Your Home When Enrolled in a Debt Consolidation Program?

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Can You Refinance Your Home When Enrolled in a Debt Consolidation Program?

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In January 2004, my wife and I turned excitedly into a cul-de-sac to find an excavator parked in an empty lot, poised to break ground on our new home the next day. 

 

A month earlier we had worked through an intense two-week period of meeting with a mortgage banker to get the financing in place for the new home.  It took some creative banking due to the, already sizable credit card debt darkening our financial picture. 

Eventually the banker found just the right combination of an adjustable rate loan for our first mortgage and an interest-only second mortgage that would result in a payment low enough to fit within the bank's requirements.

Interest rates have been at historic lows for years, so we have been happy to leave our mortgage as it is. 

That trend is seemingly reversing now, and we want to get rid of the interest-only second mortgage and get everything locked into a fixed-rate loan.  As my wife and I pulled into the bank parking lot, she asked me a very valid question:

Can we even refinance while enrolled in a debt consolidation program?

We were immediately up-front with the banker about our situation, disclosing how we got to the point of needing a debt consolidation program, when we had enrolled, how much debt we enrolled with, and how much longer we had until we were done.  She assured us that she would thoroughly comb through the numbers and options and do her very best to make it happen.

We are currently still in the middle of the process, but we are reasonably sure that we are going to be successful. 

If you are thinking of attempting to refinance, or even buy a home, while enrolled in a debt consolidation plan there are a few things that you need to be prepared for:

Explanation of Derogatory Marks on Your Credit Report:  Some creditors will mark your account as being handled through credit counseling.  Loan underwriters may ask you to give an explanation for this.  We had two accounts left on our credit report that were marked this way and were asked for an explanation.  I provided the following identical explanation for each account:

In July of 2009 we entered a credit counseling program with CareOne Debt Relief Services to take control of our finances.  With three payments left, we will complete our program in February of 2014 and will have paid off $109,000 in credit card debt.  This account will be paid in full and closed at that time.

You May Pay A Higher Interest Rate:  The interest rate offered by a bank is based partially on your credit score.   There are three credit reporting bureaus:  Equifax, Transunion, and Experian. The credit number used is your middle score.  While our credit scores have improved dramatically over the few years, my middle score was just shy of what is needed for the best interest rate.  We were "dinged" 1/8th of a percentage point due to my just slightly below the bar score.

Some Options May Not Be Available To You:  Our home has dropped in value over the last few years, as have most across the country.  Because of this, our loan-to-value ratio is greater than 80%, requiring us to have mortgage insurance for a traditional mortgage through a major underwriter.  Unfortunately, some personal mortgage insurance providers will not insure people enrolled in debt consolidation programs.  This will force us to either go with a first and second mortgage combination again (to avoid personal mortgage insurance), or explore options through a different lender.

It IS possible to refinance your mortgage or purchase a home while enrolled in a debt consolidation program, however you have to be ready to overcome a few extra hurdles along the way. 

The good news is we haven't run into any hurdle that we cannot get over yet.

As I mentioned, we are still going through the process. Stay tuned for another post detailing the rest of the story!

Have you refinanced your mortgage, or purchased a home while enrolled in a debt consolidation program?  Did you encounter any problems?

Related Links: 

Are You Ready to do What it Takes to Get Out of Debt?

Debt is a Four Letter Word, but Debt Consolidation is Nothing to be Ashamed of. 

 Interest: the Untold Story

Travis Pizel, debt management plan customer with leading provider of debt relief, CareOne Services, Inc. Travis Pizel

 

Travis is a contributing writer for the A Straight Talk on Debt blog. He is also a very active member of the CareOne community forums. Travis is currently enrolled in a CareOne Debt Management Plan (DMP). Travis candidly shares his personal journey to pay off his debt and the tips he's learned along the way. As a father and husband he provides a unique perspective on balancing debt, finances, and family in Minnesota. You can also read more from Travis on the Enemy of Debt blog, where he is a featured blogger. Compensated Blogger for CareOne Debt Relief Services.

To connect with Travis on Google+ click the

You can follow Travis on Twitter @DebtChronicles

 

 

 

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  • we tried to refinance our home to help us out and we were refused because of a medical bill going into collections.  Even though we are paying on it monthly through Care one...they said it still listed with the collection company.  When I called the collection company with is Convergent Health Care Recovery, the person said yes it is in their system and yes they are receiving payments every month.  But we were refused the refinance.  I do not understand this process, it shows we are paying the bill through CareOne, yet we were turned down for the refinance.

  • @mrskris - Yeah, I don't pretend to understand that one. As mentioned, some of our options were limited just because our credit report stated we were enrolled in a DMP.  They didn't care how much we had paid off, how much time we had left, just the words "handled by credit counseling" disqualified us for some things.  :(

  • I am really happy to say, it’s an interesting post to read. I learn new information from your article, you are doing such a great job.

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