Student loan default: rehab or consolidate for FHA vs conventional?!

[Anonymous]

This is long... so sorry. I do not want to make the wrong choice and be stuck without an option..

I have to make a decision pretty quickly regarding my student loan (PERKINS) in default. I've clarified the scenarios and wanted to run this by you all before I decide. My head is telling me one way, but my loan specialist is telling me differently. I want to make sure I make the right choice with my specific situation.

Scenario: rebuilding credit. Found out my Perkins loan for approx. $5640 recently went into default about 1 year ago. I am self-employed, so I know I need a stronger over all picture to acquire any mortgage. I was told by the CA that Perkins loans are slightly different in that at the end of rehab, the loan has to be paid in full. There will be no “agreed on” payment plan with a balance remaining to consolidate. Over the 9 months I would pay $627 per month and at the end, default would be removed from my report, and the late payments will remain. My student loan balance will also be $5400 less than it is now.

I was offered consolidation. Was told in 4-6 weeks the loan will come out of default and the entire balance will be consolidated. I am currently in an IDR plan with a $0/month payment. Obviously, the default and late payments leading up remain on my credit report. Also, the balance would be included in my total student loan debt of $67k. It would be very nice to not have to pay the $627 for 9 months, since I’m in a $0 payment situation on the rest of my loans.

I am rebuilding my credit pretty quickly, so I also want to keep a conventional mortgage on the table, in case when the time comes within the year, my score makes the cut.

Here are my questions:

1) if I chose to consolidate, would the default history on my credit report cause an FHA problem, even though the loan is out of default? What about conventional?

2) if I consolidate, would $67k vs $62k be a huge difference in the DTI calculation? I have very little “other debt” besides a car payment and a 3 credit cards with very low balances. My loan specialist guesstimated a very overreaching $500 (not including percentage of loans currently on $0 IBR.)

3) if you are not currently making payments on student loans Because of the IBR plan and have not used any deferral/forbearance, etc, what percentage of the total balance can I count on them including in the DTI for both conventional and FHA?

4) what do you think the score change would be based on either 1) reducing overall balance by $5600 and having the default removed, vs. 2) staying at $67k owed, and also having the default remain on my report? Would it be a 20+ pt difference between the two scenarios? Probably helps to know that I am under 600 on one score now, and after a lot of baddies are removed next year, this would be one of two major issues still on my report.

Lastly, my mortgage specialist says why rehab? To which I thought the answer was pretty clear, since I’m not getting a mortgage (I don’t think) within the 9 month repayment period, so I don’t have to worry about $627/month being calculated in DTI. She made it sound like it was purely about getting the loans out of default status, though I’ve heard horror stories after other people have been told this same thing and chose consolidation.

Any help is GREATLY appreciated because I am being told very different things and need some real-life opinions here. I couldn’t find any scenario matching this close enough to help me decide.

If I am missing any major considerations i haven’t mentioned, please let me know!

[stinastina]

So I'm not an expert but I agree with your plan to rehab. I'm not sure why you can't consolidate after rehab, which is what I'm doing. My understanding is that loans aren't eligible for consolidation if they are in default ? So I finished my rehab in May and consolidated with Great Lakes. I have not had them report negatively on my report ever so that's good. And I'm in the same boat as you in repaye land. So if they do report, it should show $0 per month.

I think rehab is the way to go because if they do show as negative right now, after rehab, they change to positive and you won't have that option with consolidation.

[Anonymous]

Yes I agree. I’m definitely leaning towards rehab..I think me having the Perkins makes it different because it has to be paid off completely during rehab. They said that’s why most people cannot rehab a Perkins because the payment is way too much.

I was offered the consolidation option now tHat allows you to consolidate to get a loan out of default... not sure if maybe it’s a new program.

[stinastina]

Are you sure you have to have to pay the entire loan off during rehab ? I'm reading you have to make full payments (I had direct student loans so during rehab I was allowed to make $5 payments). I googled a little and I don't see anything that says the loan must be paid in full during rehab.

[stinastina]

From mycampusloan website:

Loan Rehabilitation

The U.S. Department of Education requires that all Perkins lenders establish a loan rehabilitation program for borrowers with defaulted Perkins Loans. The Perkins Loan Rehabilitation program allows defaulted borrowers to regain many important benefits of the promissory note, which are lost if their loan defaults. These benefits include: The right to apply for periods of repayment deferment The right to apply for cancellation benefits for service rendered Continued eligibility for additional Title IV aid Benefits for a rehabilitated borrower include: The Perkins Loan will be returned to a current status and will no longer be considered delinquent. All historical information regarding the defaulted loan will be removed from credit bureau files. The borrower will receive a maximum of 10 years (including the rehabilitation period) to complete repayment of the debt. The rights and responsibilities of the existing promissory note will be reinstated. Eligibility for Title IV student financial assistance will be reinstated. Transcripts will again become available to the student. Rehabilitation requirements: The borrower must request Perkins Loan rehabilitation from the school. The borrower must negotiate a reasonable monthly payment amount with the school and make nine (9) consecutive, on-time monthly payments (for the agreed-upon amount). The loan is not considered rehabilitated until the receipt of the ninth (9th) consecutive, on-time monthly payment. To meet the criteria of on-time payments, your payment must be received no more than 20 days prior or 20 days after your payment due date. Any missed payment during the nine (9) month rehabilitation period will immediately cancel the rehabilitation agreement. Payments may not be made in advance for future monthly payments. One payment must be made each of the nine (9) consecutive months in the rehabilitation period. Multiple payments received in one month will count as a single rehabilitation payment for the month. While a borrower can attempt to rehabilitate a defaulted loan more than once, a borrower may receive only one rehabilitation per loan. A subsequent default on a successfully rehabilitated loan cannot be "cured" by a second rehabilitation period. Borrowers should contact their lending institution if they are interested in rehabilitating their defaulted Perkins loans.

[VALoanMaster]

FHA is going to hit you with a payment of 1% of your student loan balance unless your IBR payment amortizes the loan. Meaning your monthly payment will pay off the loan by the end of the term. A conventional loan will give you more flexibility with the student loan payment but less flexibility with the total debt to income ratios.
It sounds like the consolidation option is going to be your best bet.

[stinastina]

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@VALoanMaster wrote:
FHA is going to hit you with a payment of 1% of your student loan balance unless your IBR payment amortizes the loan. Meaning your monthly payment will pay off the loan by the end of the term. A conventional loan will give you more flexibility with the student loan payment but less flexibility with the total debt to income ratios.
It sounds like the consolidation option is going to be your best bet.

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I don't understand what you posted. Can you explain it in lay person's terms please ?

[Anonymous]

Upon doing tons of research, there are new requirements for FHA, which means that unless the loan is amortized, which means there is a set payment amount to be paid off in xx amount of time, (IBR payment cannot be $0) for FHA, then 1% of your entire student loan balance must be calculated as a monthly payment in your debt to income ratio.

For fannie Mae specifically, people in IBR payment plans, even if their payment is $0, are considered in an amortized loan payment, and they use the payment listed on the report... $0. For people with high student loan debt, this is huge because otherwise you may have had a 700-800/month payment factored in, which lowers the amount of home you can buy. I’m thinking that I’m going to aim for conventional it at all possible.

Hope this is all accurate, from what I’m reading this New Fannie Mae policy started this May.

[stinastina]

Wow, that is horrible news for me. My repaye amount is 0 but 1% of my loans would wipe out any chance of me having a mortgage payment. It's like they are penalizing low income people.

What is Fannie mae ? Is that a mortgage program like FHA ? I wonder if USDA does the 1% also ?

[Anonymous]

Are you on IBR? Or deferment? (Not sure if deferment shows a payment of $0)

It’s my understanding that If you are in deferrnent and have 12-18 months left of deferment at time of closing (depending on lender), then for a USDA it won’t factor in at all. However, if the report says deferment until “date”, they have to use 1%.

Fannie Mae and Freddie Mac are conventional conforming mortgages kind of like FHA but with more stringent guidelines. I guess for people with IBR, Fannie Mae is the only way to go without factoring student loan debt. Freddie MAC won’t even underwrite an IBR/$0 loan.

I heard that some really experienced officers advise some people to come out of IBR to negotiate a low fixed payment, and then go back to IBR afterwards.

If you do some searching online there are lots of people talking about the various programs and ways they worked around it. It’s all so confusing and stressful.