Defaulted Student Loans Mortgage Agency Guidelines

This Article Is About Defaulted Student Loans Mortgage Agency Guidelines

There are two types of student loans. Federal and private student loans. Federal student loans are student loans that have been guaranteed by the federal government. Federal student loans need to be paid. If the student loan goes into collections, you cannot qualify for a government-backed mortgage loan if you have federal defaulted student loans. This includes government home mortgages like FHA loans. Private student loans are like any other installment loan. Government student loans are not exempt from bankruptcy discharge. However, private student loans are. If you have federal defaulted student loans, you need to get them out of the defaulted status before you are able to apply for a mortgage. In this article, we will discuss and cover the mortgage agency guidelines on defaulted student loans.

Mortgage Agency Guidelines On Federal Versus Private Student Loans In Default

What are the mortgage agency guidelines for federal versus privately outstanding student loans

Every year 1 million-plus Americans default on their student loans. Defaulted student loans massively affect consumer’s credit as well as home-purchasing abilities. A defaulted student loan means it has been moved to collections by the creditor. For federal defaulted student loans this will occur after 270 days without payment. For private defaulted student loans, the accounts go into collection status after 120 days after nonpayment.  A student loan going into default can cause a borrower’s credit score to drop 60+ points. A steep drop in consumer credit scores will affect their ability to qualify for various programs as well as the most competitive interest rate possible. There is no way a borrower can qualify for a government-backed mortgage if they have delinquent federal student loans. The federal student loan needs to get out of arrears and into rehabilitation before they are able to qualify for a government home mortgage. However, borrowers can qualify for government and conventional loans if they have private defaulted student loans.

Fannie Mae And Freddie Mac Mortgage Agency Guidelines On Conventional Loans With Student Loans In Default

An applicant can still qualify for a conventional loan with a federal or private student loan in default with a high credit score and good timely payment credit history. Borrowers cannot have any other disqualifying factors besides the delinquent federal and/or private student loans. The borrower will need to be able to provide an explanation regarding what steps they have taken to make the loan current.  The debt will be counted towards the borrower debt-to-income ratio. FHA borrowers can proceed as well with a private student loan in collection under the same circumstances. However, borrowers with outstanding federal student loans in default will not be able to qualify for FHA loans.

Defaulted Student Loan Versus Qualifying For Government-Backed Mortgages

Borrowers with defaulted federal student loans cannot qualify for government-backed loans as they cannot pass CAIVRS or the Credit Alert Interactive Voice Response System. CAIVRS automatically flags those with delinquent federal debt. Any FHA borrower with a defaulted loan on CAIVRS will be denied from qualifying for a government-backed mortgage until it’s brought out of default.

There are 3 ways to get federal student loans out of default: rehabilitation, consolidation, or settlement.

Student Loan Rehabilitation

What is student loan rehabilitation

Loan rehabilitation is the process of making nine consecutive, income-based payments to your student loan servicer. This makes up for the previous nine missed payments that led to default and bring the loan up to date. After the nine payments are made your loan servicer will contact the credit bureaus to remove records of the loan being in default and you will regain the ability to forebear your loan, modify payment plans, and qualify for forgiveness. Rehabilitation is the longest process to bring your loans out of default but it will likely lead to the largest boost in credit because it removes the record of the default from your credit report.

Consolidating Your Student Loans That Are Defaulted

The next option is to consolidate your student loans with a direct consolidation loan. In order to qualify for consolidation, you must have at least one loan that hasn’t previously been consolidated. You must agree to pay the future consolidated loan on an income-based repayment plan or make 3 full monthly payments prior to consolidation. This process will allow borrowers to qualify for forbearance, forgiveness, and eventual payment modifications. The record of having defaulted will stay on their credit report which may continue to affect their credit score until it is removed in 7 years. The process of consolidation takes about 30-90 days making it at worst 3 times faster than loan rehabilitation. 

Paying The Defaulted Loan In Full

The third option is to pay the defaulted loan in full or negotiate a settlement with your servicer. Settlements with student loan servicers are typically 80%-90% of the loan’s remaining balance and would be paid within 90 days of the approval from the servicer.

Defaulted Private Student Loans

What does outstanding private student loans mean

When in default with a private student loan, borrowers will be able to pursue a mortgage unlike with defaulted government student loans. But the effect on the credit score and debt-to-income ratio will make it harder to qualify and increase the interest rate on their mortgage loan. Private lenders do not have to offer the same programs to get your loans out of default, but borrowers still have similar options. The most effective options are to refinance or negotiate a settlement. By refinancing the borrower may get a lower monthly payment and will have closed the collection account which will eventually improve their credit. Unlike a federal student loan consolidation, refinancing will not lead to the record of default being removed from credit, but a closed collection account will affect credit less over time. A settlement though will relieve the borrower of the debt obligation and will eventually improve the borrower’s credit as well.- Private student loans that are defaulted can be charged off by the student loan provider. However, federal student loans cannot be charged off.

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