Is Your Student Loan Holding You Back from Buying a House?

     Going to college is often seen as a milestone into adulthood. Figuring out how to pay for college is often a topic of discussion. With the exception of scholarships and those who are fortunate enough to pay tuition in full, most of us will end up taking out student loans. In fact, approximately 42 million people currently have student loan debt. 

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What Happens to Your Credit Once a Student Loan Is Taken Out?

     Regardless of whether the loan is taken out by the student or a parent/guardian, it will still be reported on the student’s credit report as an installment loan.  As it accrues interest the loan amount will increase–unless it is an unsubsidized loan–and this will be reflected on the borrower’s credit report. Ultimately, a student loan is going to affect the borrower’s credit profile and their debt to income.

The Good

The good news is that while the student is attending school, the actual payments on most student loans are deferred and will reflect positively on the borrower’s report. While making payments is not required during this period, it is always a good idea to pay as much as possible even while still attending school.  This is important because interest can really add up during this time, so making regular payments–even small ones–can make a big difference on your balance. 

The Bad

Unfortunately, many people struggle to pay back their student loan debts. In the event that you fall behind in repaying your student loan(s), go into default or get sent to collections, a lender will most likely deny your application for a mortgage loan.

 Did you know the federal government created a system called the Credit Alert Interactive Voice Response System, also known as CAIVRS?  This system will flag anyone with outstanding federal loans in default or with delinquencies. If you are hoping to get a federally backed mortgage loan, you must pass the CAIVRS check. This means that even if your negative student loans are removed from your credit report, there is a very good possibility that a lender will still see these defaulted loans by using the CAIVRS system. 

It is also important to understand that student loans are not able to be discharged through bankruptcy nor do they have a statute of limitations like most other negative credit items.    This means that poorly managed student loans have the potential to hold you back for much longer than other negative items. 

If you are applying for an FHA or other federally backed loan, it is required to pass CAIVRS. While conventional loans usually don’t require a CAIVRS clearance, having defaulted student loans and delinquent items on your credit profile will hinder your ability to get approved for a mortgage. It is important that any student loan reflecting negatively, be corrected as quickly as possible and returned to good standing before applying for a home loan.

The Solution

Going into default, collections, or having late/missing student loan payments comes with a high price and can severely impact your credit score to the downside. The good news here is that you have options. In the event that you have made some mistakes, been unable to make your payments, or have gone into collections, there are multiple ways to get out of the negative and back into good graces so that you can purchase a home.

The first option is a debt settlement repayment. This can be tricky! It will require you to negotiate with your loan servicer and will take knowing your options. Most settlement repayment plans will require you to pay a lump sum of money which will likely equate to 90% of the current balance, the remaining principal and interest minus the collection charges, or the full principal balance and half of the unpaid interest. This all must be negotiated with the loan servicer and you need to request a ‘paid in full’ statement once negotiations and payments have been fulfilled. 

Most people do not have those kinds of funds sitting in their bank account, however, so for everyone else, there are rehabilitation programs and loan consolidation options available.  If you opt to do a loan rehabilitation, you agree to make a monthly payment that is equal to 15% of your annual income divided by 12. You agree to pay these on time for 10 consecutive months after which your default status will be removed from your loan (and credit reports) and any collection payments through wage garnishment or Treasury offset will stop. 

Opting for a loan consolidation will ultimately lead to all your loans being paid off and combined into one large loan. Since there are multiple rules regarding what can be consolidated, and what must go through rehabilitation first, it can be hard to know what options are available and how it will affect the outcome of your student loan debt.