Mortgage and defaulted school loan

[200mph]

My brother and I are trying to buy a house. His credit report shows no credit and has a defaulted school loan. I am in the process of trying to decide if he should rehabilitate the loan or consolidate.

What I understand:

Rehabilitate: After 9-12 months, default status is removed, but may be hard to find someone to purchase the loan to finalize the rehabilitation process.

Consolidate: Can happen with three on time payments. Default status remains although the loans show payed in full. Default status is removed after 7 years.

Rehabilitate is better for credit over the long term. The 7 year mark for is February 2015.

We want to move out in less that 6 months. As far as his credit score goes, he will have 2 secured credit cards, resolved all outstanding accounts on his credit report except the school loan. What is the best option in this case? Do we have to wait for rehabilitation? Or should we take the chance and consolidate with the purpose of getting out sooner. Thanks

[Kathy4NU]

I would rehab.  

I did this a year ago.  9 payments later and my loan was picked up within a month of the 9th payment.  My credit score went up 100 points!  I closed on my house the following month.  Even if the loans are not picked up you can call the DOE and ask that they update the credit bureaus.  I did that.  They asked if I was in the process of buying a house or car and I told them YES.  They had them updated within a week.

[200mph]

Thanks for the reply.

My logic is that if we consolodate in three months and take a chance on a loan, we might get it. If we dont get it, than wait until feburary of next year to try again.

With the rehab, we have to wait until december before we can try. Personally, I am under no time crunch but he and his gf are.

Just want to know how much of a risk we are taking with consolidating and getting approved. I wish it were clear cut...seems silly with no exact answer. You should be able to forcast this stuff

[redsox31324]

Keep in mind also that if you are looking for any federal backed home loans (VA, FHA, or USDA) you will need to have a clear Caivrs report.  This means you have to have no outstanding federal debts, ie federal student loans.  If you go conventional, you will have to have 5% down.  I was in the same situation in July, and decided to rehab the loans.  I had a LO pull my credit and advise me on the best way to go.  After nine months, my loans were picked right up and everything was clear on the Caivrs report.  My middle score went from 572 to 675 and I was able to get qualified for a VA loan.  I'm scheduled to close on the 9th of April.

There's no clear cut answer until you talk to a Loan Officer and see what type of program will work best for you.  I'd advise talking to one first and see what they think is the best option.

[200mph]

Our loan officer advised us on consolidation. Consolidation would pay off the loans in full and start a completely new loan. Although, the original would show defaulted. We have well over 5% down. Also, have been eyeballing the FHA 203k.

[ShanetheMortgageMan]

+1 on rehabbing.  If you consolidate, do you still have the option to rehab?  If not, then you would miss out on being able to get those late payments removed until they just naturally fall off your credit report.  That is a big gamble for something you said you have no need to rush on (why does your brother & his g/f need to get this done so soon?).