Contrary to urban legend, there are serious consequences to not paying student loans. The issue: You missed payments but want to buy a house. What can you do?
In previous article, we eavesdropped on three friends discussing what can happen when you’re behind on paying off student loans. Lisa agreed to research their options. This is her report.
1. Be clear on what you want to achieve. If you’re lost on the road, you must clarify your intended destination. The same applies here – determine what you want to achieve. The intended destination here is getting approved for a mortgage.
2. Determine your current status. If you’re lost on the road, you have to figure out where you are now. Today Lisa decided that “we missed payments on our student loans” as too general a statement. Specifically what is blocking mortgage approval?
3. Consult map. Next you consult map to determine your options. Same here. Research is next step.
4. Plan route. Decide on roads to take to reach destination. Lisa addressed plan to gain mortgage approval.
5. Take action.
Let’s take each of the steps outlined above one at a time. Misty, Eula and Lisa agreed that the goal was to get approved for a mortgage. What’s their current status?
1. There are two main roadblocks to getting approved for a mortgage.
A. Limited cash for down payment reduces their options to government mortgage programs (i.e. FHA, VA and USDA). Lender must clear borrower through CAIVRS to process the loan application. CAIVRS won’t clear borrowers unless their student debt (or other federal debt) is in good standing.
B. Mortgage approval requires a reasonable FICO credit score.
Step 3 is to consult the map (do the research). Lisa found that she wasn’t in Kansas anymore when she entered the world of dealing with student loans. Basically the road to mortgage approval broke down to this:
1. Get back on track with student loans. Options vary depending on loan status.
A. Delinquent Loans, when borrower misses payment(s), have one set of options (i.e. make account current, canceling loan, deferment/forbearance, consolidating, etc.).
B. Defaulted Loans, missed nine payments or more, have different options. Options available to delinquent borrower may not be available to a borrower in default.
2. FICO Credit Scores – Not making payments impacts a borrower’s credit in two ways:
A. Current Debt reflects what you owe and where you’re delinquent right now.
B. Credit History documents your past. Getting your student loans current removes negative situation from current debt, but missed payments stay in your credit history for seven years. The negative affect on your score decreases with time.
The simplest and hardest step remains – take action.
Kathy Godin, Award-Winning Loan Officer and Branch Manager
Prime Mortgage Lending, Inc.
Where people, not computer robots, answer the phone.
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