When you were filling out financial aid applications to help cover your college tuition you probably did not give much thought to how your student loan payments would affect your budget once you graduated. You almost certainly never contemplated how your student loans might impact your credit when you were ready to apply for a mortgage. However, whether you considered the ramifications ahead of time or not, the reality of the matter is that your student loans can sometimes make or break your ability to qualify for a home loan even if your loans have never been paid late or are currently in deferment.
If you are preparing to apply for a mortgage or are already struggling to qualify for a mortgage because of the student loans on your credit reports, the good news is that all hope is not necessarily lost. In fact, depending upon your situation there may even be a few different ways to solve your qualification problems. Take a look...
DTI Problems
Buying a home when you have outstanding student loan debts can certainly be a challenge for multiple reasons. One of the first ways that student loans can make it difficult for you to purchase a home is due to the fact that the amount of these loans will usually be counted against you when you apply for a mortgage. As a result your debt to income ratio (DTI) will increase, causing the amount you qualify to borrow to be reduced. Sometimes these DTI issues can make it impossible to qualify for the home you really want to purchase.
Student loans may cause you DTI issues even if the loans are currently deferred. (Before you graduate and often for certain periods of time after graduation your student loans may be placed into a deferred status - that is to say that your payments are temporarily placed on hold.) Unfortunately even if you are not currently making a monthly payment on your student loans some portion of the debt still may be counted against your income when you apply for a mortgage loan and the lender calculates your ability to make a house payment.
Potential Solution #1: Consolidation
When you consolidate multiple student loans into a single new loan you can often lower your monthly minimum payment. Assuming that you are eligible to lower your payments through consolidation, consolidating those loans offers you a potential solution to lower your DTI thus enabling you to qualify for a larger loan amount.
Additionally, when you consolidate your student loans your credit scores might even see a small upward bump as well. By consolidating multiple student loans you can reduce your overall number of accounts with balances. Since FICO's credit scoring models pay attention to your number of outstanding debts, consolidating could certainly be a positive move for your credit.
Credit History Problems
If you have not always made your student loan payments on time you may have another obstacle to try to overcome when you fill out a mortgage application. Unfortunately, if your loan payments are not current then they may put the brakes on you purchasing a new home entirely. Qualifying for a mortgage while your student loans are past due is going to be nearly impossible.
Naturally the easiest way to solve this problem is to pay to bring your loans back to current status if you can afford to do so. However, if your past due student loan debt is too high for you to pay off in one fell swoop, rehabilitation may be an option for you to consider.
Potential Solution #2: Rehabilitation
You may be able to eliminate the default status on your student loans and move those loans from collections back to current on your credit reports by entering into a rehabilitation program. To enter into the loan rehabilitation program you must agree in writing to make 9 consecutive monthly payments (each within 20 days of the due date). The size of your monthly payments will be based upon your income and a variety of other factors.
Once you have completed your rehabilitation payments successfully, your loan should be eligible to be removed from default status and should resume being reported on your credit as a current loan. Unfortunately, any late payments previously made on the loan before the account went into rehab will remain on your credit reports where they may continue to damage your credit scores accordingly for up to 7 years. As a result, during your loan rehabilitation process it would be wise to look into other ways to try to improve your credit - either on your own or with the help of a reputable credit expert.
DIY or Professional Help?
If you like so many millions of other Americans took out student loans to help finance your education then learning the best ways to manage that debt after graduation is a essential to your financial and credit wellbeing. You can try to figure out the best way to manage your loans by yourself or you can work with a pro. Naturally you have the right to try to consolidate or rehabilitate your student loans with your lender completely on your own (just like you have the right to try to repair your own credit or even attempt to perform your own vehicle repairs). However, just like DIY credit repair or auto repair may be an extremely difficult and inadvisable project, so can trying to resolve your student loan issues without professional assistance.
Remember, student loan servicers are supposed to help graduates by making sure that you are well aware of all of the different options you have available. Your loan servicers should be telling you about consolidation options, rehabilitation options, and even loan forgiveness options. However, the truth is that most of the time they do not. (Would a lender really be motivated to help you pay a smaller monthly fee even if the option is available to you?) By hiring a reputable student loan expert to assist you there will be someone on your side, guiding you step by step through finding your best loan repayment, rehabilitation, or forgiveness options and even filling out the paperwork to apply for these programs on your behalf.
CLICK HERE if you would like to have a student loan relief expert reach out to you today.
Michelle Black is an author and leading credit expert with nearly a decade and a half of experience, a recognized credit expert on talk shows and podcasts nationwide, and a regularly featured speaker at seminars across the country. She is an expert on improving credit scores, budgeting, and identity theft. You can connect with Michelle on the HOPE4USA Facebook page by clicking here.
