Keeping Score

Can I qualify for a construction loan after settling credit card debt?


Settling a debt for less than you agreed to pay can damage your credit score for years. And a construction loan generally has more stringent requirements than a standard mortgage.

The content on this page is accurate as of the posting date; however, some of our partner offers may have expired. Please review our list of best credit cards, or use our CardMatch™ tool to find cards matched to your needs. Terms apply to the offers listed on this page.

Keeping Score with Steve Bucci

Ask Steve a question, or see if your question has already been answered in the Keeping Score answer archive.

Can I qualify for a construction loan after settling credit card debt?

Expert Q&ADebt settlements and charge-offs can damage your credit score for several years. And construction loans generally have more stringent requirements than a standard mortgage, so you may need time and some new forms of credit to rebuild your credit score.

Check out all the answers from our credit card experts.

Dear Keeping Score,

My wife and I are recovering from a drop in our creditworthiness. My wife became ill and was no longer able to work. Our credit card debt exploded. In the spring of 2016, I made a poor decision to settle my debt.

I didn’t do my research and did not realize that the credit card company would still list a settlement for less than the original full balance as a charge-off. Although I was able to make the payments, it lowered my credit from the upper 700s to 583. The following year, we decided to sell our home and use the profit to pay off more debt and use the rest to buy land to build a future home. We have completed two settlements out of three cards, with one to be completed next month.

In the spring of this year, I opened a secured credit card of just $200 to reestablish a good payment history. My score has increased to 621. My debt-to-income ratio is good. I make $117,000 a year and have worked at the same job for 13 years, and my only debt is a student loan with a balance of $21,000. My wife’s credit is in the 700 range. She is not working right now, but will be this fall.

We are renting now, but we are attempting to get a construction loan for the build next summer. My hope is I can get my credit score to at least to 700 by next spring. My concern is the charge-offs on my credit report. Is it still possible to get a construction loan with these challenges? Thanks for your time and help.  – Peter

Dear Peter,

Yes, I have to agree with you that you probably made a poor decision going the debt settlement route. Debt settlement is by nature an adversarial process of “credit chicken.” In essence, you refuse to pay and the creditor trashes your credit and pursues collection actions (sometimes in court) until one of you gives up. The result can be devastating to your credit score for years.

From a credit standpoint, you may have been better off to have filed for bankruptcy. A bankruptcy may have been more damaging to your score initially, but your recovery may have been faster. Once you discharge a bankruptcy, you can’t refile for several years. This may make you more attractive for new credit sooner because you can’t file again quickly. But what’s past is past.


Tip: Selling your home to pay off credit card debt is not always the best option. It’s costly to sell your home and buy a new one, and the equity you’ve earned in your house will take a big hit.

A construction loan is a different animal in the lending world, mainly because of the nature of the risk it presents to the lender. As such, it has different and more stringent requirements than a fully secured mortgage.

These loans usually have a one-year term, after which they are converted to a more standard mortgage product. This one-year gap is the “risky” part of the proposition for the lender, and they are going to want to be sure you will not default somewhere along the line. Your goal of 700 is a good one in this regard, because most lenders generally want a score of at least 680.

See related: How many credit cards do you need to qualify for a mortgage?

Unfortunately, you are only two years into what will be several seven-year dings on your credit report with your multiple charge-offs. If you were five years into this, you might have a better shot at a construction loan. While it is true your score is recovering, a 38-point gain in two years tells me you that you have a long road ahead of you.

You say you want to have score of at least 700 by the spring, but that is only nine months away. That means you will have to add eight or nine points to your score every month, which will not be easy. This is more than twice the progress you’ve made in the past two years.

I suggest you establish a relationship with a local bank, credit union or mortgage broker. As you get comfortable in your new relationship, ask a lender in the mortgage department to help you develop a plan that will result in your getting the loan you want. If your loan is going to be based on both your incomes, your wife’s credit score will be of some help. In a joint loan, both scores figure.

You need to make the next few years count. Rebuild your score by opening new types of credit as your score improves. And for heaven’s sake, pay all your bills on time, every time. And don’t neglect to include the forgiven balances you settled as income on your tax return. Each creditor will be sending you a 1099-C form showing the amount of debt that was forgiven (considered income to you).  Lastly, stay away from debt settlement. As you have found out, that puppy has a long tail!

Remember to keep track of your score!

Editorial Disclaimer

The editorial content on this page is based solely on the objective assessment of our writers and is not driven by advertising dollars. It has not been provided or commissioned by the credit card issuers. However, we may receive compensation when you click on links to products from our partners.

What’s up next?

In Keeping Score

Can’t get a secured card or a personal loan – how can I build credit?

You can’t change negative information in your credit report, but you can add some positive data. Here are a few options if you can’t get a secured card or a personal loan.

See more stories
Credit Card Rate Report
Cash Back

Questions or comments?

Contact us

Editorial corrections policies

Learn more