If you are managing your debt with credit counseling or a debt management plan, will that count against you in the mortgage qualifying process?

Credit counseling vs. debt management programs

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Credit counseling alone -- that is, getting advice on budgeting and creating a plan for debt repayment -- can only have a good effect on your credit. The fact that you are being advised doesn't show up on your credit history, and reducing your credit card balances and paying on time improves your score.

However, some debt help firms put their clients in debt management plans (DMPs). DMPs work like this: You send the company a check each month, and they distribute the payment to all of your credit card companies. Many counselors don't just take your money and pay your creditors. They can arrange lower interest rates, smaller payments and perhaps even a balance reduction.

Debt management programs and your credit score

The fact that you're in a DMP may be reported to credit bureaus. From a credit history perspective, this may be good or it may be bad. Some creditors "re-age" a delinquent account after several successful on-time payments to show it as current on your credit report. Those actions can really help increase your FICO score.

If your debt management company negotiates concessions with your creditors, the way the creditor reports these concessions can lower your credit score.

According to its website, FICO looks at it this way: "Choosing to make partial payments or agreeing to settle for less than the full amount on accounts may be regarded negatively by the FICO® scoring model. Additionally, any late payments occurring either before or after you began the plan may also be regarded negatively."

Creditors may hit your credit history with derogatory codes such as "not paid as agreed" or "account settled for less than amount due." On the other hand, creditors may not report any concessions at all to credit bureaus. And once you have paid off your plan, it drops off your credit history.

Mortgage qualifying and DMPs

Mortgage underwriters have mixed feelings about DMPs. Some take your enrollment as an indication that you have credit problems and are therefore not a good risk. The FHA, for example, considers DMPs equal to Chapter 13 bankruptcies and requires you to have made at least 12 payments into your plan, on time, to become eligible for financing.

Others take the position that enrolling in a DMP is a responsible way to attack credit problems before they get out of control. Enrollment in a DMP may be simply ignored. Fannie Mae doesn't even mention DMPs or credit counseling in their guides.

Given the unknowns whether enrollment in a debt management program will affect your chances of qualifying, ask an experienced loan officer so there are no ugly surprises when you apply for your next mortgage.