Home Buying

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It can vary between weeks or months of missed payments, but collectors typically take steps before resorting to lawsuits. Some states also have a legal limit that prevents them from suing after a certain timeframe.

Debt collectors can feel relentless. You might be wondering, “When can this stop? Can they really sue me?” The answer is yes—debt collectors can sue you to recover the debts that you owe. 

There’s no single answer to how soon a debt collector can sue—it can be between weeks or months, but they’ll usually take steps before it gets to that point. There’s also a legal time limit, depending on your state, that prevents you from getting sued after a certain time frame. Also, if the debt owed is less than $500, debt collectors are much less likely to sue you.

This guide will shed light on debt collector lawsuits, how soon they can happen, how they affect your credit, and—most importantly—how to avoid them altogether.

Be sure to also familiarize yourself with the Fair Debt Collection Practices Act so you’re aware of your rights. 

Table of contents:

  • When Can Debt Collectors Sue?
  • Factors Affecting a Debt Collector’s Decision to Sue 
  • What to Do if You’re Sued
  • How Debt Collection Affects Your Credit 
  • Strategies to Avoid Debt Collections 

When Can a Debt Collector Sue You?

While there’s no set-in-stone timeline on how soon a debt collector can sue, you are more at risk if you have an unpaid debt for more than six months. 

However, there is a legal timeframe for how long debt collectors can collect debt. This is known as the statute of limitations, which varies by state and ranges from three to 15 years. 

The statute of limitations also depends on the type of debt that is owed—here’s a breakdown of the different types of debt: 

  • Written contracts: These are repayment term agreements that are signed by the borrower, like mortgages and loans. The limitation for this type of debt is an average of 6 years. 
  • Oral contracts: These are verbal agreements that are not written on paper, like a handshake agreement. These average about four years. 
  • Open-ended accounts: These types of debts come from things like credit cards since they don’t have a set repayment amount. These average about five years after your last credit card payment. 
  • Promissory notes: These are written promises to repay a specific sum of money. The average timeline is about six years. 

The statute of limitations doesn’t wipe your slate clean. Debt collectors can still reach out to ask you to pay the debt after this expires—they just can’t legally take you to court. However, there are rules about when and how debt collectors are allowed to contact you: 

  • Only being able to reach you within specific hours (typically 8 am – 9 pm) and have a limit on call frequency within a week.
  • Honoring your requests to stop contacting you at work, via email/text, or on social media.

Tip: Making a partial payment to your debt may restart the timeline for your statute of limitations because it shows the debt collector that you haven’t abandoned the debt. Avoid confirming that the debt is yours, and never give out personal information over the phone.  

Debt Collection Statute of Limitations by State 

Below is a list of the statute of limitations by state according to each debt type. Be sure to double-check the Attorney General office for your state for the most up-to-date information on these time ranges: 

State  Written Contract  Oral Contract  Open-Ended Accounts  Promissory Notes
Alabama 6 years 6 years 3 years 6 years
Alaska 3 years 3 years 3 years 3 years
Arizona 6 years 3 years 6 years 6 years
Arkansas 5 years 3 years 5 years 5 years
California  4 years 2 years 4 years 4 years
Colorado 3 (6 most debts; rent) (2 tortious breach) 3 years (6 short-term debt/rent ) (2 tortious breach) 6 years 6 years
Connecticut 6 years 3 years 6 years 6 years
Delaware 3 years 3 years 3 years 3 years
District of Columbia 3 years 3 years 3 years 3 years
Florida  5 years 4 years 5 years 5 years
Georgia 6 years 4 years 6 years 6 years
Hawaii 6 years 6 years 6 years 6 years
Idaho 5 years 4 years 4 years 5 years
Illinois  10 years 5 years 5 years 10 years
Indiana 10 years 6 years 6 years 10 years
Iowa 10 years 5 years 5 years 10 years
Kansas 5 years 3 years 3 years 5 years
Kentucky 10 (15 years for contracts entered into on or before July 15, 2014) 5 years 10 years 15 years
Louisiana  10 years 10 years 3 years 10 years
Maine 6 years 6 years 6 years 20 years
Maryland 3 years 3 years 3 years 6 years
Massachusetts 6 years 6 years 6 years 6 years
Michigan 6 years 6 years 6 years 6 years
Minnesota 6 years 6 years 6 years 6 years
Mississippi 3 years 3 years 3 years 3 years
Missouri 10 years 5 years 5 years 10 years
Montana 8 years  5 years 5 years 8 years
Nebraska 5 years 4 years 4 years 5 years
Nevada 6 years 4 years 4 years 3 years
New Hampshire  3 years 3 years 3 years 6 years
New Jersey 6 years 6 years 6 years 6 years
New Mexico 6 years 4 years 4 years 6 years
New York 6 years 6 years 3 years 3 years
North Carolina 3 years 3 years 3 years 5 years
North Dakota 6 years 6 years 6 years 6 years
Ohio 6 years 4 or 6 years 6 years 8 years
Oklahoma 5 years  3 years 3 years 6 years
Oregon 6 years 6 years 6 years 6 years
Pennsylvania 4 years 4 years 4 years 4 years
Rhode Island 10 years 10 years 10 years 10 years
South Carolina 3 years 3 years 3 years 3 years
South Dakota 6 years 6 years 6 years 6 years
Tennessee 6 years 6 years 6 years 6 years
Texas 4 years 4 years 4 years 4 years
Utah 6 years 4 years 4 years 6 years
Vermont 6 years 6 years 6 years 14 years
Virginia 5 years 3 years 3 years 6 years
Washington 6 years 3 years 6 years 6 years
West Virginia 10 years 5 years 5 years 6 years
Wisconsin 6 years 3 years 6 years 10 years
Wyoming 10 years 4 years 8 years 10 years

Sources: Nolo and InCharge Debt Solutions

Factors Affecting a Debt Collector’s Decision to Sue 

While the statute of limitations sets the outer boundary, debt collectors consider several factors before deciding to sue you. Here’s what can influence their decision:

  • Amount of debt: Larger debts are more likely to be pursued through lawsuits. Going to court is a lengthy and costly process, so the potential return on investment (your repayment on a large debt) makes the legal process more worthwhile for them. Smaller debts might be seen as less cost-effective to collect through lawsuits, and some states will avoid small claims courts altogether. 
  • Age of debt: Fresh delinquencies, where you’ve recently missed payments, are often addressed more aggressively than older debts. Collectors might prioritize working with you on repayment plans before resorting to lawsuits for newer delinquencies.
  • Your location: Local laws and court costs can play a role. In states with more favorable legal environments for debt collection or lower court filing fees, collectors may be quicker to sue.
  • Collector practices: Some larger collectors may be more aggressive than others—they sometimes have access to more resources that help score and prioritize consumers with larger debt amounts.

What to Do if You’re Being Sued

Being sued by a debt collector can be stressful, but some steps from the Consumer Financial Protection Bureau and Federal Trade Commission can help you navigate the process:

  • Respond to the collector: Responding to the lawsuit is crucial. Ignoring it can lead to an automatic judgment against you, meaning the court will rule in the collector’s favor without your defense, and you can lose your ability to dispute. The debt collector could also get the court to put a lien on your property, like your house, if you don’t respond. 
  • Talk with an attorney: An attorney can advise you on your legal rights and help you navigate the lawsuit process. To start, you can reach out to a legal aid office in your area or find an attorney with experience in the Fair Debt Collection Practices Act (FDCPA). 
  • Gather paperwork: Collect any documents related to the debt, including account statements, original credit agreements, proof of payments you’ve made, and any communication you’ve had with the collector. This documentation can be vital for your defense if you’re wrongly accused of owing debt. 
  • Review the lawsuit: If your debt is valid, review the claim carefully and make sure that the debt hasn’t expired (time-barred debt) and the debt amount is accurate. 
  • Negotiate a settlement: Sometimes, debt collectors are open to settling the debt for less than the full amount owed. Negotiating a settlement can help you resolve the case faster and potentially save you money.
  • Do nothing: If you’re past the statute of limitations and the collection account is about to fall off your credit report, then the best action is inaction. 

If you think you’re debt collector is doing something illegal, you can report problems to: 

How Debt Collection Affects Your Credit

A debt collection lawsuit will likely show up on your credit report and can stay on there for up to seven years. After seven years, this negative mark will automatically fall off your credit report.

Having collection accounts on your report may make it more difficult to receive future credit. If you can get approved for credit, you might face higher interest rates, loan denials, or even higher security deposits for rentals since you’ll be seen as less creditworthy to lenders. 

However, you do have the right to dispute errors on your credit report. If the debt collection lawsuit or judgment is inaccurate, you can file a dispute with your credit bureau or AnnualCreditReport.com to see about having it removed.  

Strategies to Avoid Debt Collections

Let’s face it, dealing with debt collectors is no picnic. Here are some proactive steps you can take to avoid the hassle and stress of debt collector lawsuits altogether:

  • Communicate with creditors and collectors: Proactive communication demonstrates your willingness to resolve the debt. If you’re struggling to make payments, explain your situation and try to negotiate a realistic payment plan you can afford.
  • Try credit counseling: Consider seeking help from nonprofit credit counseling agencies. These organizations offer free or low-cost financial counseling and debt management plans. They can help you get out of debt, create a budget, negotiate with creditors, and develop a strategy to repay your debts.
  • Debt consolidation: Imagine juggling multiple credit card bills. Debt consolidation lets you combine them into one loan with (hopefully) a lower interest rate. This makes managing your debt easier (fewer bills) and potentially saves you money in the long run.

Take Control of Debt With a Debt Consolidation Loan 

Armed with the knowledge of the statute of limitations, your rights under the Fair Debt Collection Practices Act, and effective debt management strategies, you can navigate debt collector situations with more confidence. Credit.com offers a variety of resources, like debt consolidation loans, to help you manage your finances and work on your credit health. 

Source: credit.com

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Over the years, there’s been a popular argument that it’s better to buy a home when mortgage rates are high.

The logic is that home prices should be lower if rates are high, and thus you get a property for less.

And the cherry on top is that if/when mortgage rates fall, you can get a lower interest rate too!

When all is said and done, you basically get the best of both worlds. A lower purchase price and low mortgage rate.

But is this scenario actually reality? And do home prices and mortgage rates even have such a relationship?

Buying a Home When Interest Rates Are High

On the surface, buying a home when interest rates are high seems like a pretty bad deal.

After all, your monthly mortgage payment is going to be more expensive if the interest rate is higher.

For example, imagine a $500,000 home purchase with 20% down. That’s a $400,000 loan amount.

  • 7% mortgage rate: $2,661.21
  • 4% mortgage rate: $1,909.66

The difference in PITI payment each month is a whopping $750! That’s not a small amount by any measure.

*You can quickly compare other monthly payments on my mortgage rate charts page.

Anyway, this large difference in payment could make many would-be home buyers ineligible for a mortgage.

Remember, you have to qualify for a home loan, so if your income doesn’t cover that big jump in payment, you could be shut out completely.

For some, the argument to buy when rates are high stops right here. But shouldn’t home prices be cheaper if mortgage rates are higher?

Again, you would think so since expensive items might reduce demand and lead to increased supply.

But if you look at history, there isn’t a strong correlation between home prices and mortgage rates.

In other words, when one rises, the other doesn’t necessarily fall. Or vice versa. So if you’re looking for a bargain, don’t expect one simply because mortgage rates are “high.”

You’ll Get More Payment Relief with a Lower Mortgage Rate

Another issue is that a reduced purchase price doesn’t translate to much of a lower payment.

For example, let’s compare a $500,000 home purchase and $450,000 home purchase at 6% mortgage rates with 20% down.

  • $400,000 @6%: $2,398.20
  • $360,000 @6%: $2,158.38

In this scenario, the monthly payment is just $240 less per month. And that assumes you can get a home for 10% off.

Remember, there’s no inverse relationship historically between mortgage rates and home prices.

So you might not even see such a discount just because mortgage rates are high.

Instead, you could face both a higher mortgage rate and higher home price, as we’ve seen over the past few years.

This also debunks the idea that home prices will go up when interest rates fall. Again, no clear relationship on that front.

They could fall together if the economy tanks and lower rates become less helpful to prospective buyers now facing bigger issues, like unemployment or reduced wages.

Your Home Buying Decision Shouldn’t Be Dictated by Mortgage Rates

Simply put, a home buying decision goes well beyond available mortgage rates.

It doesn’t matter if the 30-year fixed is 3% or 8%, it matters if you can afford the home, if you can make payments consistently for the next decade, and if you love/want/need the home.

If you’re making the purchase based on the mortgage rate, you’re either trying to time the market or you’re potentially just squeaking by.

And you could face affordability issues if property taxes rise, or insurance premiums increase.

You certainly don’t want to bank on the marry the house, date the rate strategy, which hasn’t worked out great the past few years.

Some seem to think they can buy now and perform a rate and term refinance later to lower their payment.

But there’s no guarantee mortgage rates will fall by a large amount, or that you’ll qualify when that time comes.

So instead of focusing on the rate, look at the big picture. Is it the right home for you? Is the price affordable? Do you picture yourself living there for the next 5-10 years or longer?

Does it make sense financially based on your income, assets, and employment? If yes, great, proceed. If not, maybe take a harder look at the situation.

And remember not to make the false assumption that there’s a strong relationship between rates and prices.

Should You Sell Your Home When Rates Are High or Low?

Again, mortgage rates are just one piece of the pie. There are many different factors to consider when buying or selling a property.

One needs to study supply/demand, home price outlooks, and the wider economy. As noted, there isn’t a strong relationship between prices/rates historically.

So if rates are low, you can’t just assume prices are going to skyrocket and that it’ll be a great time to sell your home.

Sure, it could be a good time to sell if demand increases. But what if rates fall because the economy is in the dumps? Fewer prospective buyers, lower prices, right?

It’s not so simple. If you’re selling and buying a replacement property, that’s another consideration.

Will it be easy to find a replacement? At the moment, selling a home is somewhat scary because inventory is so low in most places.

You could find yourself renting until a suitable property comes along. And who knows where rates will be then?

I know several people who sold at the supposed “height of the market” a few years ago to lock in profits.

But since then haven’t been able to find a new home to purchase. In the process, they’ve missed out on years of ownership and they face significantly higher interest rates today.

Long story short, don’t try to time a home purchase or home sale based on mortgage rates.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

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Well, here we are. It took longer than expected, but mortgage rates have finally strung together a decent rally after nearly three years of increases.

They fell below year-ago levels a week or two ago, per Freddie Mac, and took another big leg down after a softer-than-expected jobs report on Friday.

As for why, fewer new hires, increased unemployment, and slowing wage growth all point to a slowing economy. And interest rates tend to drop when the economy cools.

In addition, the Fed is expected to pivot and begin cutting rates, which could act as another tailwind for lower mortgage rates.

This has many thinking we’ll see another surge of home buyer demand, and potentially a big jump in home prices. But is it true?

Do Lower Interest Rates Actually Increase Home Prices?

It’s entirely logical on the surface. If something people want becomes cheaper overnight, demand for it should hypothetically increase.

And if demand increases, the price might rise as supply decreases, especially if there are already too few homes for sale.

But if that were true for single-family homes, why didn’t asking prices crash over the past year and change?

After all, rates on the 30-year fixed mortgage nearly tripled from its record lows in the mid-2s in early 2021 before peaking at just above 8% last fall.

Using the same logic above, home prices would surely nosedive as buyers fled the market, leading to a massive supply glut.

Instead, home price appreciation simply cooled off and home prices continued to increase in most parts of the country.

In fact, if you look at many home price indices, we have new all-time high home prices pretty much every month.

Home Prices Continued to Rise as Mortgage Rates Nearly Tripled

Just take this chart from the Federal Housing Finance Agency (FHFA), which oversees Fannie Mae and Freddie Mac.

Their latest report released on July 30th revealed that home prices increased a solid 5.7% from May 2023 to May 2024.

However, home prices were flat month-to-month from April after rising 0.3% a month earlier.

Still, if you look at the chart, you’ll see that home prices didn’t slow much as mortgage rates began their ascent at the start of 2022.

There was a brief pause as the housing market digested the near-tripling in rates, but then prices continued their ascent unabated.

So if we want to argue that there’s an inverse relationship between rates and prices, this last few years wouldn’t be a good example of that.

All we’ve really seen is a positive correlation between rates and prices, in which BOTH have risen together.

And now that mortgage rates appear poised for a bit of a rally, should we ignore that and say they have a negative relationship?

Can we say prices should have fallen when rates went up, but now that rates are falling they should go up even more?

Maybe There’s Just Not Much of a Correlation at All

Instead of trying to invent a relationship between mortgage rates and home prices, maybe we should just come to terms with the fact there isn’t a strong one.

And there’s nothing wrong with that. If you look at history, changes in mortgage rates and home prices are weakly related, this according to the Urban Institute.

I’ve posted this chart before, but here it is again if you don’t believe it. You’ll see all types of combinations of annual mortgage rate and home price changes.

These little dots won’t make it easy to make the argument that when mortgage rates fall, home prices rise. Or vice versa.

Instead, you’ll see instances when they rose together, fell together, or sometimes, to fit the popular narrative that isn’t necessarily true, went in opposite directions.

Of course, nominal home prices (not adjusted for inflation) rarely go down to begin with, so we don’t even have that many examples to look at.

Why Would Home Prices Fall If Mortgage Rates Got Cheaper?

Well, just look at the economy…sure, mortgage rates are important because they can make a big impact on affordability.

The lower the rate, the more a home buyer can afford, all else equal. In fact, a 1% drop in mortgage rates is worth an 11% decrease in price.

But this simplistic view ignores cash buyers. And it ignores the financial health of prospective home buyers who need to get approved for a mortgage.

Just consider the last few days. The stock market has gotten hammered, with the Dow Jones falling more than 1,000 points today and the Nasdaq off nearly 600 points.

This sell-off was sparked by concerns about the health of the economy, with weaker data expected to usher in Fed rate cuts.

There’s a good chance that softer data will be accompanied by lower mortgage rates too.

Simply put, signs of a slowing economy improved the odds for a Fed rate cut, and also gave bonds a boost, which are a safe haven for investors when times get tough.

But if households are in worse shape because of said data, you’re going to have fewer home buyers out there. You could also have more sellers, perhaps even distressed ones.

Taken together, we might have a situation where the supply of homes for sale rises and prices fall, despite a big improvement in mortgage rates.

So yes, home prices could in fact go down, even if mortgage rates are lower!

But that’s not a foregone conclusion either, and will likely be highly variable based on economic strength and individual market dynamics throughout the country.

The main message here is there’s no strong correlation any which way. Thinking otherwise might simply lead to disappointment.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

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I got active on Twitter over the past year and change and to my surprise (not sure why it’s surprising really), encountered lots of housing bears on the platform.

Many were/still are convinced that the next housing crash is right around the corner.

The reasons vary, whether it’s an Airbnbust, a high share of investor purchases, high mortgage rates, a lack of affordability, low home sales volume, rising inventory, etc. etc.

And the reasons seem to change as each year goes on, all without a housing crash…

So, now that we’re halfway through 2024, the obvious next question is will the housing market crash in 2025? Next year’s got to be the year, right?

But First, What Is a Housing Crash?

The phrase “housing crash” is a subjective one, with no real clear definition agreed to by all.

For some, it’s 2008 all over again. Cascading home price declines nationwide, millions of mortgage defaults, short sales, foreclosures, and so on.

For others, it might just be a sizable decline in home prices. But how much? And where?

Are we talking about national home prices or regional prices? A certain metro, state, or the nation at large?

Personally, I don’t think it’s a crash simply because home prices go down. Though it is a pretty uncommon occurrence to see nominal (non-inflation adjusted) prices fall.

Over the past few years, we’ve already experienced so-called home price corrections, where prices fell by 10%.

In 2022, we were apparently in a housing correction, defined as a drop in price of 10% or more, but not more than 20%.

Ostensibly, this means a drop of 20%+ is something much worse, perhaps a true housing crash.

But you have to look at the associated damage. If home prices fall 20% and there aren’t many distressed sales, is it still a crash?

Some might argue that there’s simply no other outcome if prices fall that much. And maybe they’d be right. The point is a crash needs to have major consequences.

If Homeowner Joe sells his home for $500,000 instead of $600,000, it’s not necessarily a disaster if he bought it for $300,000 a few years earlier.

He’s not happy about it, obviously, but it’s not a problem if he can still sell via traditional channels and even bank a tidy profit.

Of course, this means others who had to sell wouldn’t be so lucky, since their purchase price would likely be higher.

Still, this hinges on a major decline in prices, which historically is uncommon outside of the Global Financial Crisis (GFC).

Stop Comparing Now to 2008

One thing I see a lot is housing bears comparing today to 2008. It seems to be the go-to move in the doomer playbook.

I get it, it’s the most recent example and thus feels the most relevant. But if you weren’t there, and didn’t live it, you simply can’t understand it.

And if you weren’t, it’s hard to distinguish that time from now. But if you were, it’s clear as day.

There are myriad differences, even though they’re quick to mock those who say “this time is different.”

I could go on all day about it, but it’s best to focus on some main points.

At the moment, housing affordability is poor thanks to a combination of high home prices and equally high mortgage rates, as seen in the chart above from ICE.

Despite a big rise in prices over the past decade, the high mortgage rates have done little to slow down the party.

Yes, the rate of home price appreciation has slowed, but given the fact that mortgage rates rose from sub-3% to 8% in less than two years, you’d expect a lot worse.

It’s just that there’s really no correlation between home prices and mortgage rates. They can go up together, down together, or move in opposite directions.

Now, proponents of a housing crash often point to buying conditions right now. It’s a horrible time to buy a house from a payment-to-income perspective. I don’t necessarily disagree (it’s very expensive).

But that completely ignores the existing homeowner pool. And by doing so, it’s a totally different thesis.

You can say it’s a bad time to buy but that the average homeowner is in great shape. These statements can coexist, even though everyone wants you to take one side or the other.

Look at the Entire Homeowner Universe

To put this perspective, consider the many millions of existing homeowners coupled with prospective home buyers.

Your average homeowner today has a 30-year fixed-rate mortgage set somewhere between 2-4%.

In addition, most purchased their properties prior to 2022, when home prices were a lot lower.

So your typical homeowner has a rock-bottom interest rate and a relatively small loan amount, collectively a very attractive monthly payment.

To make matters even better for the foundation of the housing market, which is existing homeowners, most have very low loan-to-value ratios (LTVs).

They’ve also got boring old 30-year fixed-rate loans, not option ARMs or some other crazy loan program that wasn’t sustainable, as we found out quickly in 2008.

These homeowners also haven’t tapped their equity nearly as much as homeowners did in the early 2000s, despite home equity being at record high levels (see above).

This is partially because banks and mortgage lenders are a lot stricter today. And partially because of mortgage rate lock-in. They don’t want to give up their low mortgage rate.

In other words, the low mortgage rate not only makes their payment cheap, it also deters taking on more debt! And more of each payment pays down principal. So these loans (and their borrowers) become less and less risky.

Some have turned to home equity loans and HELOCs, but again, these loans are much more restrictive, typically maxing out at 80% combined loan-to-value (CLTV).

In 2006, your typical homeowner did a cash-out refinance to 100% CLTV (no equity left!) while new home buyers were coming in with zero down payment as home prices hit record highs.

Take a moment to think about that. If that’s not bad enough, consider the mortgage underwriting at that time. Stated income, no doc, you name it.

So you had virtually all homeowners fully levered along with a complete lack of sound underwriting.

Slumping Home Sales in the Face of Poor Affordability Is Actually Healthy

That brings us to home sales, which have slumped since the high mortgage rates took hold. This is normal because reduced affordability leads to fewer transactions.

The worry is when this happens supply could outpace demand, resulting in home price declines.

Instead, we’ve seen low demand meet low supply in most metros, resulting in rising home prices, albeit at a slower clip.

While housing bears might argue that falling volume signals a crash, it’s really just evidence that it’s hard to afford a home today.

And the same shenanigans seen in the early 2000s to stretch into a home you can’t afford don’t fly anymore. You actually need to be properly qualified for a mortgage in 2024!

If lenders had the same risk tolerance they had back in 2006, the home sales would keep flowing in spite of 7-8% mortgage rates. And prices would move ever higher.

That spike in home sales in the early 2000s, seen in the chart above from Trading Economics, shouldn’t have happened. Fortunately, it’s not happening now.

At the same time, existing homeowners would be pulling cash out in droves, adding even more risk to an already risky housing market.

Instead, sales have slowed and prices have moderated in many markets. Meanwhile, existing owners are sitting tight and paying down their boring 30-year fixed mortgages.

And with any luck, we’ll see more balance between buyers and sellers in the housing market in 2025 and beyond.

More for-sale inventory at prices people can afford, without a crash due to toxic financing like what we saw in the prior cycle.

Before creating this site, I worked as an account executive for a wholesale mortgage lender in Los Angeles. My hands-on experience in the early 2000s inspired me to begin writing about mortgages 18 years ago to help prospective (and existing) home buyers better navigate the home loan process. Follow me on Twitter for hot takes.
Latest posts by Colin Robertson (see all)

Source: thetruthaboutmortgage.com

Apache is functioning normally

Key Takeaways: 

  • The total household debt in 2023 was $17.1 trillion, according to Experian®.
  • The Fair Debt Collection Practices Act prohibits collection agencies from threatening you or calling your family members.
  • The avalanche method helps you pay off debt from the highest to lowest interest rates. The snowball method targets your smallest balances first.
  • The lower your account balance is, the less your interest rate will affect you.

Experian reported $17.1 trillion as the total American household debt by the end of 2023. Unfortunately, debt doesn’t just hamper your current spending power—it can also detract from your nest egg and savings accounts. 

The best way to tackle debt is to be proactive. Here, we’ll discuss several methods to help you get out of debt in 2024. We’ll cover everything from DIY plans to working with debt relief agencies, and we’ll share powerful tools like Credit.com’s debt-to-income (DTI) calculator. 

1. Gather Your Debt-Related Paperwork

Gathering all your debt-related documents in one place helps you see how much you owe and who you need to repay. Some of the information you’ll want to collect includes:

  • Monthly statements: Check the downloadable monthly statements attached to your checking and savings accounts.
  • Recurring bills and utilities: Cell phone bills, utility bills, and rent payments all fall under this umbrella.
    Income information: Look at paycheck stubs or your bank accounts so you know what, on average, you can expect in income each month.

Credit reports: You can request your credit report from the three bureaus and a free credit report card from Credit.com.

You can log your outstanding debt information in a spreadsheet, then sort the page from least to greatest to see which items are top priorities.

2. Build a Monthly Budget

Next, you can build a monthly budget based on the information you’ve just gathered. Ideally, you’ll account for major budget categories like rent, groceries, and recurring medical bills. You can then allocate any remaining funds toward your debts, and then your savings goals after your DTI reduces. To start, you can use Credit.com’s free monthly budget template to better visualize your finances. This template is fully customizable, so you can remove or add categories based on your needs.

Regularly update your monthly budget doc to reflect increases or decreases in your income.

3. Address Any Debts in Collections

When debt goes to collections, that means a bill you’ve yet to repay has been sold to a debt collection agency. Collections agencies can be very aggressive, so it helps to know your debt collection rights.

Sometimes, agencies might mistakenly try to collect debts that have already been repaid. If this error occurs, you’ll be able to rectify the situation with a phone call. If you’re determined to be responsible for the debt in question, it’s best to address it quickly to preserve your credit health.

If a collections agency violates FDCPA guidelines, you can potentially sue them for breaking the law.

4. Explore Debt Repayment Methods

The avalanche method and the snowball method are two popular debt repayment strategies. Effectively using these strategies is a great way to get out of debt quickly.

The avalanche method takes a top-down approach to debt repayment. Here, you’ll focus on repaying your debts with the highest interest rates first, and then you’ll move to paying off your less expensive debts as time goes on. It can be slow going at first, but if you stick to it, you can save more money using this method than if you were to use the snowball method.

With the snowball method, you focus on repaying your smallest debts first as you gradually work toward your largest bills. Taking this “least to greatest” approach to repayment will help build momentum and keep you motivated as you pay off your debts.

Use spare change to help pay your debts down faster. If you use $10 to by an $8 drink, count the leftover $2 toward your debt.

5. Lower Your Interest Rates

Interest rates are essentially fees that lenders charge you for borrowing money. If you have a high interest rate, you’ll have to pay a significant amount of interest in addition to the funds you need to repay. Here are some potential ways to lower your interest rate:

  • Request a lower rate: Once they’ve built rapport, cardholders can ask their banks for lower interest rates. Having strong credit scores and a solid credit history increases the likelihood of success.
  • Consider debt consolidation or refinancing: Debt consolidation loans help you pay off accounts with higher interest rates and gather all of your debt under one bill.
  • Use balance transfer credit cards: Balance transfer credit cards help you move your credit card debt over to accounts with low or even no interest rates during promotional periods. 

Interest payments are based on the amount you currently owe. Try to pay down your balances as much as possible.

What to Do If I Can’t Repay My Debt

If you don’t currently have the capital to pay off your debts, you have several options to reduce your financial burden:

  • Write a hardship letter: You can write a hardship letter that details your current financial situation and send it to your creditors. These letters might pave the way for credit card debt forgiveness.
  • Meet your minimum balance: Try to pay at least your minimum balances due to keep your payment history intact.
  • Gain additional income: If possible, pick up a second job or a financially secure side hustle to help you pay off your debts faster.
  • File for bankruptcy: Chapter 7 and Chapter 13 bankruptcy can greatly reduce the debt you’re responsible for, but there can be consequences, such as a significant hit to your credit.

Options for Debt Relief

There are alternative strategies for debt relief to consider alongside more tried and true methods. Here are some examples:

  • Increase your financial knowledge: Tap into online financial education courses and workshops to boost your literacy and learn more ways to get out of credit card debt.
  • Start a debt management plan: A trustee or credit counseling agency will help you create a plan to whittle down your debts.

Debt settlement: You might be able to negotiate with creditors to pay a lower amount of debt than originally owed. However, debt settlement can adversely affect your credit.

Learn More Debt Management Tips With Credit.com

The more financial knowledge you have, the easier it will be to get out of debt. Check out Credit.com’s personal finance guide to gain more insights on debt management and debt relief solutions. And when you’re ready, get your free credit score with Credit.com to see how your debts are impacting your credit.

Source: credit.com

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Debt settlement can be a lifeline for individuals struggling with overwhelming debt, offering the possibility of reducing their debt burden and achieving financial freedom. However, it’s essential to understand the ins and outs of debt settlement to make informed decisions about whether it’s the right option for you. 

In this comprehensive guide, we’ll cover everything consumers should know about debt settlement, including when it’s a good idea, when it isn’t, how to initiate the process, and more.

Understanding Debt Settlement

Debt settlement is a debt relief strategy in which a debtor negotiates with creditors or debt collectors to settle their debts for less than the full amount owed. Instead of repaying the entire debt, the debtor agrees to make a lump-sum payment or series of payments to satisfy the debt, typically at a reduced amount.

When Debt Settlement Is a Good Idea

Debt settlement may be a viable option for individuals facing significant financial hardship and unable to repay their debts in full. Here are some situations in which debt settlement may be a good idea:

  1. Overwhelming Debt: If you have substantial unsecured debt, such as credit card debt or medical bills, that you’re unable to repay through traditional means, debt settlement may offer a way to resolve your debts and avoid bankruptcy.
  2. Financial Hardship: If you’ve experienced a significant loss of income, medical emergency, or other financial hardship that has made it impossible to keep up with your debt payments, debt settlement can provide relief by reducing your overall debt burden.
  3. Avoiding Bankruptcy: For individuals who want to avoid filing for bankruptcy but are unable to repay their debts in full, debt settlement offers an alternative solution that may allow them to negotiate more favorable repayment terms with creditors.

When Debt Settlement Isn’t a Good Idea

While debt settlement can offer relief for some consumers, it’s not the right solution for everyone. Here are some situations in which debt settlement may not be a good idea:

  1. Limited Financial Resources: Debt settlement requires a lump-sum payment or series of payments to settle your debts, which may be challenging if you have limited financial resources or are unable to save money for settlements.
  2. Negative Impact on Credit Score: Debt settlement can have a negative impact on your credit score, as settled accounts may be reported as “settled for less than the full amount” on your credit report, which can lower your credit score and make it harder to qualify for credit in the future.
  3. Potential Tax Consequences: Depending on the amount of debt forgiven through settlement, you may be required to pay income tax on the forgiven amount, which can result in a significant tax liability.

Initiating the Debt Settlement Process

If you’re considering debt settlement as an option, here are the steps to initiate the process:

Step One: Assess Your Financial Situation

Start by assessing your financial situation, including your total debt load, monthly income, and expenses. Determine how much you can realistically afford to offer as a settlement to your creditors.

Step 2: Contact Your Creditors

Reach out to your creditors or debt collectors to inform them of your intention to settle your debts. Be prepared to negotiate with them to reach a mutually acceptable settlement amount.

Step 3: Get Everything in Writing

Once you’ve reached a settlement agreement with your creditors, make sure to get all the terms of the agreement in writing, including the agreed-upon settlement amount, payment schedule, and confirmation that the debt will be considered satisfied.

Step 4: Make Payments

Fulfill your end of the settlement agreement by making the agreed-upon payments to your creditors. Be sure to follow the payment schedule outlined in the agreement to avoid any potential complications.

Step 5: Monitor Your Credit Report

After completing the settlement process, monitor your credit report to ensure that the settled accounts are accurately reported. If there are any discrepancies, dispute them with the credit bureaus to have them corrected.

Seeking Professional Help

Navigating the debt settlement process can be complex, so it may be beneficial to seek professional assistance from reputable debt settlement companies or credit counseling agencies. These organizations can help you negotiate with creditors, develop a customized debt settlement plan, and provide guidance on managing your finances more effectively.

Debt settlement can offer a lifeline for individuals drowning in overwhelming debt, providing a path to financial freedom and relief from creditor harassment. However, it’s essential to carefully consider whether debt settlement is the right option for your financial situation and to understand the potential risks and consequences involved. By following the steps outlined in this guide and seeking professional guidance when needed, you can navigate the debt settlement process with confidence and take control of your financial future.

Source: credit.com

Apache is functioning normally

You may have heard that the nation’s largest mortgage lender just rolled out a zero down mortgage.

If you were around for the housing market crash in the early 2000s, it could feel like déjà vu. And not in a particularly good way.

After all, it was toxic home loans that sunk the market then, sending home prices crashing and short sales and foreclosures surging.

Does this mean we’re going down a familiar path, which will likely see a familiar outcome?

Or is it a big to do about nothing?

UWM’s New 0% Down Purchase Program

United Wholesale Mortgage (UWM), which works exclusively with mortgage brokers, recently unveiled a new loan program called “0% Down Purchase.”

As the name implies, it allows a home buyer to purchase a property with nothing out of pocket, at least with respect to down payment.

Upon first glance, this looks and sounds like a bad idea, especially with how high home prices are at the moment. Not to mention mortgage rates either…

But before we get into the judgment of the program, let’s talk about how it works.

It’s essentially a 97% LTV loan, widely available from both Fannie Mae and Freddie Mac, featuring a 3% silent second mortgage provided by UWM.

The silent aspect of the second mortgage means it doesn’t carry any monthly payments, or interest for that matter.

Instead, this lien just quietly sits behind the first loan and only comes due if the borrower sells the property, or refinances the first mortgage.

If borrowers choose to, they can make payments on the second mortgage, though there’s no obligation to do so.

Most will likely just ignore its presence and when the time comes, pay it off via a sale or refinance.

And when this occurs, it will simply result in slightly lower sales proceeds, or a bump in their loan amount when refinancing (but factor in how much they pay down the first loan between that time).

Who Qualifies for This Program?

There are two ways to qualify for this new program, one income-based and the other reserved for first-time home buyers.

Those with income at or below 80% of the Area Median Income (AMI) for the address of the property their purchasing can qualify if they meet Freddie Mac’s Home Possible® guidelines.

They simply need a 620+ FICO score and the loan-to-value ratio (LTV) must be between 95% and 97%.

So-called “very-low income borrowers” with qualifying income at or below 50% AMI will receive a $2,500 credit as part of the 3% down payment assistance.

This credit does not need to be repaid and is deducted from the balance of the second mortgage.

The other way to qualify, assuming your income is too high, is by being a first-time home buyer and meeting both Freddie Mac’s HomeOne® and UWM’s guidelines.

As a quick reminder, a first-time buyer is someone who has not had ownership interest in a home in the three years prior to application.

In addition, they must have a 700+ FICO score and the LTV must be greater than 95%, up to a maximum of 97%.

The Maximum Purchase Price is $500,000

Because the 3% credit is limited to $15,000, the max purchase price is $500,000.

This would result in a loan amount of $485,000 at 97% LTV with the silent second set at $15,000.

As noted, there are no monthly payments on the first mortgage, with the second accruing no interest either.

It comes with a 360-month loan term, aka 30 years, and features a balloon payment upon sale or refinance.

Simply put, a home buyer with limited down payment funds may now be able to purchase a property they wouldn’t have qualified for before.

The million-dollar question is does this significantly increase risk, or just boost home purchase loan volume for UWM?

How Much Riskier Are Zero-Down Loans?

Now I don’t want to be flippant and say down payments don’t matter. But if the baseline is 3% down, is 0% much different?

Sure, there is some skin in the game at 3%, or 3.5% in the case of an FHA loan, but it’s still pretty minimal.

It’s hard to say what difference it would make in terms of borrower behavior. Perhaps the down payment provides some risk mitigation.

Maybe it deters a high-risk borrower from making the decision to buy a home versus rent.

But ultimately you have to look at layered risk. Back in the early 2000s, zero down mortgages were pervasive.

However, they were offered alongside stated income underwriting and/or no doc underwriting.

In addition, you could buy an investment property with nothing down, again with limited documentation regarding your income, assets, or employment.

On top of that, borrowers often took out adjustable-rate mortgages, or worse, option ARMs that allowed for negative amortization.

Today, these loans need to fully underwritten, even if they don’t require a down payment. And my guess is most if not all will be 30-year fixed-rate mortgages.

That makes me feel a little better about them, even if they lack a financial commitment from the borrower.

And when you look at it in the context of 3% down loans being readily available from any lender that offers Fannie Mae or Freddie Mac loans, it doesn’t feel a whole lot different.

If we were comparing it to the traditional 20% down payment required for a home purchase, that’d be an entirely different story.

Then you’d feel that this program was pretty novel and potentially dangerous.

Source: thetruthaboutmortgage.com

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When you apply for a home loan, an underwriter will review your file in order to make a lending decision.

They can approve your loan, deny your loan, or possibly suspend your loan pending additional information.

The two most common outcomes are approval and denial, but even an approved loan is typically “conditional.”

This means it’s actually a conditional approval that requires certain requirements to be met before you’re issued a final approval.

Only at that point can you sign loan documents and eventually fund your loan.

Not All Mortgage Approvals Are Created Equal

There are various levels of loan approval in the mortgage world.

If you’ve been considering a home purchase, you’ve likely come across the terms mortgage pre-qual or mortgage pre-approval.

As the names suggests, it’s a preliminary step in the home loan approval process, a sort of “seeing where you stand.”

A pre-qual is the less robust of the two and often just involves light calculations (sans any real paperwork) to determine your purchasing power.

Depending on the bank or lender in question, a pre-approval may involve a credit pull and the furnishing of certain documentation such as pay stubs, tax returns, and bank statements.

With this information in hand, a lender can give you a fairly good idea of how much house you can afford and whether you qualify for a home loan.

It’s still pretty preliminary though, which explains why it’s called a pre-approval. And it’s also not a formal loan application, nor is it reviewed by an actual underwriter.

Once you find a home and make an offer, you’d formally apply for a loan and if approved, it would be a conditional loan approval.

This approval is subject to meeting any outstanding conditions, as determined by the loan underwriter.

After those are met, you’ll be issued what’s called a “final approval” and will be able to sign loan documents and fund/record.

Prior-to-Doc Conditions

If and when you receive a conditional loan approval, you’ll also be given a list of conditions that must be met to get a final approval.

These are known as “prior-to-doc conditions,” or PTDs for short. Before you can receive loan documents to sign, these need to be signed off.

The loan underwriter (or loan processor) will provide this list of conditions when they review your loan file.

Typical PTD conditions include things like:

– rental and employment verification
– bank statements (showing proof of funds or deposits)
– tax returns or transcripts
– credit card statements
– CPA letter if self-employed
– mortgage statements (for other properties)
– copy of driver’s license for identification
– copy of check for down payment/earnest money
– home appraisal
– title search
– gift letters
– proof of homeowners insurance
– flood certification
– lock confirmation (if floating your rate)
– letters of explanation (LOEs)

As you can see, there can still be quite a bit of work once you’re conditionally approved for a mortgage.

This explains why it typically takes a month or longer to get a mortgage, even if you’re approved in a matter of days (or minutes).

However, many of these items are straightforward and can often be satisfied quite easily. Others simply take time, like the home appraisal and title search.

There are also times when the underwriter needs more information, so a letter of explanation (LOE) may be required to clear up any questions or confusion.

Tip: Work diligently with the loan officer or mortgage broker to submit a complete and clean loan file upfront to avoid extra paperwork requests later!

Final Approval and Clear to Close (CTC)

Once your list of PTDs are satisfied, you’ll receive what is known as a “clear-to-close” (CTC) notice and a final approval from the underwriter. This is great news and means you’re almost to the finish line!

A clear-to-close is the underwriter’s way of saying all conditions were met and the loan documents can finally be generated. At this time, you’ll also receive your Closing Disclosure (CD).

It lists all the details of your loan, including your interest rate, monthly payment, closing costs, and your right of rescission (if applicable).

This document must be sent to you for review at least three business days before loan signing.

At this time, you’ll also make an appointment to sign with a notary public (or to eSign if available in your state). And you’ll receive wire instructions from escrow.

But wait, there’s more!

Prior-to-Funding Conditions

Once you’ve signed your loan documents, there might be another set of conditions known as prior-to-funding conditions, or PTFs.

Typically, these involve some housekeeping by the lender and the title/escrow company and might just be a matter of confirming and sending a wire.

Common PTF conditions include things like:

– employment verification
– final credit check (to see if any new debt/inquiries)
– verification of funds to close
– any additional letters of explanation
– title/escrow tasks like sending a wire or requesting proof of funds

After the PTF conditions are cleared, your loan will be able to fund and record with the county clerk.

This can still take a day or two depending on timing, wires, etc. Yes, it’s time-consuming, but a mortgage is a big deal so be patient!

Can I Still Be Denied After Receiving a Conditional Approval?

The short answer is yes. The home loan process generally takes 30 to 45 days.

During that time, if anything material changes or is discovered by the underwriter, it’s possible that your conditional approval can turn into a loan denial.

For example, you might be denied if the underwriter finds out you quit or lost your job, or if you missed a different mortgage payment. Or if you applied for other loans or racked up new debt.

The same might be true if you’re unable to verify income, assets, etc., or if the home inspection reveals property issues that can’t be resolved.

Perhaps the appraised value came in low and you no longer qualify, or rates skyrocketed and you failed to lock your loan.

There are countless ways to jeopardize a mortgage. While some things might be out of your control, many are not.

This is why you’re typically told to do nothing and wait for the loan to fund before spending or making any big life changes.

Ultimately, lenders want to know that you’re able to pay back the loan, so anything that counters that belief can put your approval into question.

To make the process as painless as possible, do as you’re told and provide documents promptly when asked.

Mortgage Approval to Funding Steps

  • Mortgage pre-qualification (optional)
  • Mortgage pre-approval (optional)
  • Formal loan application
  • Conditional loan approval
  • Satisfaction of PTD conditions
  • Final loan approval (clear to close)
  • Signing of loan documents
  • Satisfaction of PTF conditions
  • Funding of loan
  • Recording of loan

Source: thetruthaboutmortgage.com

Apache is functioning normally

I spoke to a friend the other day who is selling their home and moving up to a bigger one.

Crazy I know! What with home prices where they are the mortgage rates more than double their early 2022 levels.

Despite this, they needed more space (and wanted a new locale) and were ready to move on from their old home.

Sure, it might not be the best time to buy a home, but it’s not always about the financials.

And even so, they’ve got a plan to offset the big jump in interest expense.

They’ve Currently Got a 30-Year Fixed Mortgage Set at 2.75%

First some background on the deal. They purchased their existing home around 2012, which was basically the housing market bottom post-GFC.

This was one of the very best times to purchase a home in recent memory. Aside from seeing their home nearly triple in value, they also snagged a crazy low mortgage rate.

A 30-year fixed at 2.75%. Pretty hard to beat. The purchase price of the home was around $400,000, and is expected to sell for around $1 million today. Also pretty hard to beat!

Problem is, mortgage rates are now closer to 7% and home prices on replacement homes are comparatively high as well.

In short, if you sell today you take on a much higher mortgage rate and sales price. This means a significantly higher payment.

They can actually absorb the higher payment, but they know swapping a 2.75% mortgage for a 7.25% mortgage isn’t a great trade-off.

So here’s the plan to offset that much higher interest expense.

Using Sales Proceeds to Prepay the New Mortgage

Now this might not be for everyone, but many home sellers today are flush with home equity.

They purchased their homes either decades ago and have no mortgage, or they purchased in the early 2010s and have seen property values skyrocket.

If we consider my friend’s $400,000 home purchase in 2012 with a 20% down payment and 2.75% mortgage rate, the loan balance would be around $222,000 today.

Assuming a sales price of $1 million, they might walk with $650,000 or more. They have elected to use some of those proceeds to put a dent in the new mortgage.

Not all of it mind you, to save for an emergency fund. But a good chunk of it.

Once their old home sells, they’ll apply a large lump sum payment to the new loan. Let’s pretend the new home was $1.2 million and they put 20% down again.

The loan amount is $960,000 and the monthly payment at 7.25% is about $6,550. Obviously, a huge jump from their old payment of about $1,300.

But they’re able to make the higher monthly payment, perhaps due to higher wages. Or maybe because they could always afford more.

Regardless, they don’t need a lower payment to make it work. And their plan is to knock down that loan balance in short order.

They Can Pay Off the New Loan in Less Than 15 Years

A Lump Sum Payment Comparison
$960k loan amount
 No extra payment
 $300k lump sum payment
Interest Rate 7.25% 7.25%
Monthly Payment $6,548.89 $6,548.89
Loan Term 30 years 13 years
Interest Savings n/a $1,018,498

Now let’s imagine that once their old home sells, they apply $300,000 in sales proceeds to the new mortgage.

That knocks down the balance to around $657,000 just a few months into their new loan term.

Importantly, this extra mortgage payment does not lower their future mortgage payments, since that’s not how mortgages work.

They’d still have to continue making that payment of about $6,550 unless they asked the lender for a loan recast.

However, and this is a biggie, they’d save about $1 million in interest if they kept the loan to maturity.

And speaking of maturity, their loan would be paid off in about 13 years instead of 30 years.

This would effectively turn their 7.25% mortgage rate into something comparable to their original interest rate. All thanks to sending those sales proceeds toward the new mortgage.

A Mortgage Refinance Still Remains an Option

In the meantime, they can also keep an eye on mortgage rates and if they fall enough, a rate and term refinance could be an option as well.

So they’re not necessarily stuck with the new 7.25% rate. And if rates do come down, they’ll have a much smaller outstanding loan balance.

This means their loan-to-value ratio (LTV) will be much lower, which equates to fewer pricing adjustments.

For example, their LTV might be closer to 50% instead of 80% when it comes time to refinance. Generally speaking, this means a lower mortgage rate too.

Aside from a refinance, a loan recast is also typically an option, assuming they want a lower payment.

This won’t save them as much money, nor will the mortgage be paid off early, but it brings monthly payments down by re-amortizing the loan based on the smaller balance.

But if you’re more interested in paying less interest, perhaps because you were used to holding a 2-3% mortgage, this is one way to do it. Assuming you can afford the higher monthly payment.

And it’s one way an existing homeowner with mortgage rate lock-in can free themselves without feeling bad about losing their old, cheap home loan.

Source: thetruthaboutmortgage.com