Q: Can I get an FHA loan with defaulted student loans?

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Stanley tate

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You can get an FHA mortgage loan with defaulted private student loans, but not with defaulted federal student loans.

Here's why.

FHA loans are made by the Federal Housing Administration. The Administration, which is a part of the U.S. Department of Housing and Urban Development (HUD) analyzes your creditworthiness in part by using the Credit Alert Interactive Voice Response System (CAIVRS) database.

CAIVRS is a database used by the federal government to flag anyone with delinquent federal debt or in default with a federal loan.

If you're in default, your FHA loan application will be denied until you're out of default.

So how do you get out of default?

How to get out of federal student loan default

The Department of Education offers student loan borrower 3 options to get federal student loan debt out of default:

  • Negotiate a settlement
  • Apply for loan consolidation
  • Enter into the loan rehabilitation program

Of the three, depending on your student loan balance, you'll likely end up choosing between consolidation and rehabilitation.

Federal student loans don't settle for pennies on the dollar. The exact opposite is true.

To settle a federal student loan, you'll need about 85-90% of the loan balance payable in 90 days.

I imagine if you had that type of money lying around, you'd likely have money for a down payment and could qualify for a conventional mortgage.

Loan consolidation and loan rehabilitation each have their own pros and cons.

The big thing to know is that if homeownership is around the corner (i.e., your closing date is in a few weeks) consolidation may be the best option for you.

Consolidation takes about 6-8 weeks to complete and bring your student loans back into good standing.

Loan rehabilitation takes 9 months.

How long does it take to update CAIVRS?

I don't have a great answer for how long it takes to update the CAIVRS database.

I've seen clients get the default removed a week or so after getting out of default. I've seen others take about a month.

The CAIVRS system isn't like the credit bureaus, which have a clear, standardized process for getting negative items removed.

With CAIVRS, information showing the student loan is in good standing has to be submitted to the appropriate FHA Homeownership Center. From there, you wait.

How long does it take to clear CAIVRS after a student loan is paid in full?

It typically takes about 7 to 10 business days after you pay a student loan in full through settlement or consolidation for the loan to clear CAIVRS.

The federal student loan settlement process takes about 2 days to complete. And consolidating a defaulted student loan into good standing takes about 30 days.

So if everything goes smoothly, you could clear CAIVRS in about 2 weeks with a settlement or about 45 days from the date you submit your consolidation application.

FHA student loan guidelines

FHA guidelines aren't all that flexible when it comes to how they calculate monthly student loan payments.

Typically, first-time homebuyers with high balances find it much easier to qualify for a Fannie Mae or VA mortgage.

Both programs will use your income-based repayment plan amount. FHA won't.

With that said, here are the FHA guidelines for calculating your monthly student loan payments into your debt-to-income ratio.

Your mortgage lender must include all your student debt into your liabilities. It doesn't matter if you're in an income-driven repayment plan or are going to have your student debt forgiven under the Public Service Loan Forgiveness program. All of your student debt must be included.

From there, to calculate your DTI, your lender will use the greater of either:

  1. 1 percent of your outstanding balance on your student debt; or
  2. the monthly payment reported on your credit report; or
  3. your actual documented payment amount that pays the loan balance in full.

In this situation, most student loan borrowers looking to buy a house with massive federal student loan debt will likely need to use the third option.

To get that option, you'll need to switch from a repayment plan based on your income to the Extended or Graduated repayment plan. Both of those plans will stretch your monthly student loan payments over 25-30 years. Usually, that's enough to lower your payments enough to squeeze you into allowable DTI limits.

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I'm a student loan lawyer that helps people like you with their federal and private student loans wherever they live.

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