How a Defaulted Student Loan Affects Your Mortgage Loan Application

If you have defaulted on a student loan, you will face an uphill battle when you approach lenders in the future. Any type of loan default will cause this problem. However, the size of student loans, combined with the fact they are the first installment loans many people take, means they often have an exaggerated affect on your credit. There are still ways to achieve a home loan, but you should be prepared to make compromises and face scrutiny.

How a Default Affects Credit

The credit bureaus, Experian, TransUnion and Equifax, share the responsibility of keeping a record of all of the debt you have incurred in your lifetime. These bureaus not only keep a record of debt, they keep a detailed score and analysis that shows lenders your relative level of risk as a borrower. Anytime you are late on a payment by 30 days or more, a lender will notify the bureaus, causing them to place a mark on your report and drop your score. A default is among the most severe penalties on your credit. Not only will each missed payment leading up to the default drop your score, the default itself will all but wipe out your credit.

What Mortgage Lenders Look For

Mortgage lenders will assess your credit score first. They will be paying specific attention to how you have performed on other loans that are like mortgages, such as car and student loans. While your performance on credit cards is important to your overall score, your installment loan record is more indicative to how well you pay off a principal through regular monthly payments. A default on an installment loan is a big no-no to mortgage lenders; they do not want you to miss a single payment, let alone fail to repay the loan altogether. If your default is over 5 years ago, though, you may be beyond the statute of limitations in your state. If this is the case, you should assure the default is no longer appearing on your credit score. Check your state reporting regulations to make sure your credit score is fair and accurate before you apply for a mortgage loan.

Overcoming a Default Stigma

If you have defaulted on your student loan, there is little you can do at this point to make that go away entirely. However, there are strategies to make the impact of the default less significant.

  • Placing at least 20% down on your home will provide you with a large vote of confidence in your lender's eyes. You will also be able to avoid mortgage insurance with this large down payment.

  • If you are eligible for an FHA secured loan, then the lender will immediately be taking on less risk. The FHA does have standard when providing these guarantees, and you may not qualify with your default. Applying for the guaranty is the only way to find out.

  • Providing supplemental information to your lender, such as income or character reference statements, may help show you have overcome the circumstances that initially caused you to default on your student loan.