To buy a home while managing defaulted student loans, consider three primary strategies:
For a temporary period, the Fresh Start program can also be an option for defaulted federal student loans.
Regardless of your chosen strategy, the default record will remain on your credit report for seven years. This could impact your access to credit cards, personal loans, and other financial products during this time.
Each of these strategies has its own benefits and drawbacks, making it critical to assess your financial situation to determine the best fit. Let’s take a closer look at each option.
Strategy #1: Loan Rehabilitation
Loan rehabilitation is a process requiring you to make nine consecutive on-time payments within a 10-month period. Successfully completing this process can restore your access to deferment, forbearance benefits, and repayment plans lost due to default. This strategy can positively affect your credit history as the default record will be removed, but any late payments reported by the loan holder before the default will stay.
Loan rehabilitation can benefit borrowers with defaulted federal student loans, allowing them to regain eligibility for government-backed mortgages like FHA loans. Keep in mind that loan rehabilitation can take up to nine months to complete, requiring your patience and commitment to making timely payments.
Strategy #2: Loan Consolidation
Loan consolidation involves merging multiple loans into one. It can be especially helpful for borrowers with defaulted student loans, as it may enable them to qualify for forgiveness and payment modifications. For consolidation eligibility, borrowers must have at least one loan that has yet to be previously consolidated. Additionally, they should agree to pay the consolidated loan through an income-driven repayment plan or by making three full monthly payments before applying for consolidation.
Although loan consolidation is typically faster than loan rehabilitation, taking around 30-90 days to complete, each option’s pros and cons should be weighed before deciding. For example, while loan consolidation can help reestablish deferment, forbearance, and loan forgiveness eligibility, it may not improve your credit history as much as loan rehabilitation.
Related: Should I Consolidate My Student Loans Before Buying a House?
Strategy #3: Full Repayment or Settlement
Full repayment involves clearing the outstanding student loan balance, including interest or fees. On the other hand, settlement is a process where you negotiate a lower payoff amount with the lender in exchange for a lump-sum payment.
Both options can resolve defaulted student loans and improve your chances of securing a mortgage loan. But late payments will persist even after paying the student debt off.
When contemplating full repayment or settlement, it’s crucial to assess your financial situation carefully and determine which option suits you best. While full repayment is the most effective solution to eliminate a default, settlement can provide a more affordable alternative for borrowers who might not have the resources for full repayment.
Strategy for Private Student Loans
For private student loans, the situation is different. Usually, the only way to resolve a defaulted private student loan is to negotiate a settlement with the lender.
Most private lenders don’t offer loan rehabilitation programs, and consolidating or refinancing student loan debt typically isn’t an option. This is because defaulting on your payments shows you’re a credit risk, which student loan refinance lenders want to avoid. That said, a lender called Yrefy specializes in refinancing defaulted private student loans, providing a potential option for would-be homeowners in this situation.
Related: Will Cosigning a Student Loan Affect Me Buying a House?
Importantly, if a defaulted private student loan no longer appears on your credit report with any of the three major credit bureaus, it typically won’t create a problem when applying for a mortgage. This is because there is usually no other record for the underwriting team to find a defaulted private loan if it’s not on your credit report.
Choose the Best Strategy For You
Remember that each of these strategies has its own benefits and drawbacks, and your unique financial situation will guide you to the best fit.
Despite these options, the record of default will remain on your credit report for seven years, potentially impacting your access to credit and mortgage loans during that time.
For more in-depth information on how defaulted student loans can lead to a mortgage denied due to student loans, consider reviewing our comprehensive guide on this topic.