Vision Credit Education, Inc.

I have heard so many negative comments from mortgage brokers about how lenders view debt management programs (DMPs). In fact, after a hearing a recent comment from a mortgage broker that I just met, I decided to delve into the issue and find out the source of the comments, reasons for the comments and just what the truth actually is. The result: let’s just say mortgage brokers are not your friend!

The Comment

This particular mortgage broker told me, “Oh don’t let people enroll in a debt management program, lenders just see these as Chapter 13′s.” Despite her financial interest in the matter, I decided to find out exactly what the truth was behind such a comment.

For the sake of argument, we have to forget the fact that most mortgage brokers are only interested in signing you up to yet another financial liability. Their skill is measured by their ability to close a sale, with as much built in profit and commission as possible, regardless of your ability to afford the loan or your ability to secure loans with better terms than what they have just encouraged you to sign papers on.

The Truth

First of all, if you are trying to close on a mortgage, you should not have financial problems. Instead, the opposite is true. You should have any debt under control, be free of any oppressive debt burdens and have reasonable savings to guard against any unforeseen circumstances.

If you are trying to buy a home or refinance a mortgage and you have lots of credit card debt, vehicle loans and other debt that you are struggling with, then you are well on your way to filing either a Chapter 7 or Chapter 13 bankruptcy. It may not happen immediately, and perhaps a foreclosure will precede your filing, but you are in bad shape.

Regardless of these facts, let’s focus on the truth behind the comment. The truth is, yes a lender may be reluctant to approve a mortgage loan if they can see that you are currently enrolled in a debt management program. Do you blame them?

You should not be making a major credit purchase while enrolled in a DMP. The purposes of a DMP include preserving your credit while avoiding defaults, judgments and other legal actions and to provide you with favorable terms on existing debt contracts.

A mortgage broker does not care about your financial security. They are trained to do one thing: identify a potential sale and to close that sale, no matter what. In fact, their commissions more than quadrupal by steering you into worse loan contracts than you otherwise qualify for. That’s right, they make more money if they convince you to agree to one loan even though you have been approved for another loan with better terms. The worst of it is, you may never know about that other approval.

Lenders approach a debt management program exactly as you would expect them to. They are concerned about your overall unsecured debt. They are concerned about your credit utilization rates. They are concerned about any history of late payments. And yes, they would be hesitant if you are currently enrolled in a debt management program. Again, can you blame them?

Once you have paid off those accounts, then you are well on your way to financial success. A debt management program can help you resolve your current debt obligations and avoid financial ruin. After completeing a debt management program, you are in much better position to qualify for and actually afford a mortgage loan.

If a mortgage broker tells you that lenders see a debt management program as a Chapter 13, tell them that lenders see your overall debt as a warning sign. At least you are taking responsibility for your financial situation and doing the best you can to responsibly repay your debt. In addition, you do not want to take on another liability until after you have taken care of your existing liabilities.

If you qualify for benefits through a debt management program, then lenders already know that you would have been a higher risk. Debt management programs only provide benefits to debtors that qualify based on need. If you do not need a DMP, then you will not receive benefits.

A for-profit debt management company does not care if you qualify for benefits or not. Their goal is to enroll you into their DMP, no matter what. Their entire interest is to collect monthly fees from you, which are guaranteed regardless of whether your creditors supply benefits. If you think this is bad, then debt settlement companies are 10 times as bad. These are the types of companies that mortgage brokers will try to scare you about, and they will try to lump nonprofit credit counseling organizations into this category.

A nonprofit credit counseling organization will evaluate your situation with you and will include you in the development of your action plan. They will help you develop your own plan, one that they receive nothing for, if it is in your best interests.

If you need a debt management program, then understand that any reasonable lender would have already declined your mortgage application. If you need a DMP, then understand that a home purchase is still important, and it should be a priority once you have repaid your debt.

Understand that a DMP is an admission that you need a breakfrom high interest and fees. Creditors will only agree to it if you meet need-based qualification guidelines and agree not to apply for new credit while enrolled. Buying a home while enrolled in a DMP is irresponsible and can even threaten the benefits you may have already received.

To protect yourself, make sure that you get multiple opinions on your situation. See what are the pros and cons of a debt management program. Also, make sure you are getting information from many sources, especially those that do not stand to profit from your decision!