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Best option for defaulted loans and future mortgage

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New Contributor

Best option for defaulted loans and future mortgage

My SO and I are fixing up our credit and hoping to apply for a mortgage in the next year or so. He currently has 3 defaulted student loans totally around $22k. I've been reading about rehabbing and consolidating and I'm wondering which is best when planning on a mortgage in the future? We're also concerned rehabbing payments may be too high for us to comfortably afford.

Any info is appreciated. Thanks!
4 REPLIES 4
Established Contributor

Re: Best option for defaulted loans and future mortgage

Hi,
Actually it's quite the opposite.
I'm biased. I don't really like consolidation because of what you lose in the process and see it only as 1) a last resort when you are trying to mortgage and already have the pre-approval 2) when a borrower has a large loan and significant, steady finances to back it up. For a Consolidation you can either consolidate immediately and be limited to IDR plans (but not really, as Calyx explained in another thread) or do the 3 voluntary payments. These payments are calculated the same way for rehab. But the downside is he's going to be getting a brand new loan (so all the effects on his credit report due to that), at 100% utilization and the old ones will close and age off sooner. The default will stay on his credit report.

Now if he rehabs, he'll have payments for 9-10 months, but again they are based on the save calculations as consolidation. One method is using paystubs which I was told requires a borrower to fill out a form with income and expenses. Payments in regular plans after getting out of default will not include expenses. Additionally, when rehab is done, people can request to be put on income driven repayment plans. (Servicers often don't tell borrowers about them which is why a lot of people default). The default will be removed. Sometimes lates are removed, though it's not guaranteed. His tradelines will continue to age. For a FHA loan, they will take into account his monthly payment obligation on IDR rather than loan total. You can read more about that in the mortgage topic.
Any further questions?
Hope this helps clarify things.



Message 2 of 5
Valued Contributor

Re: Best option for defaulted loans and future mortgage

I would rehab the student loans because it will be the best boost to your score and credit profile over-all.
The loans may still have the lates reporting, but some servicers delete them. More imporantly, the default will come off.
In addition, you'll have nice, long positive tradelines which will contribute to your credit mix/history and score.

If you consolidate, you'll have negative charged off accounts that don't go away until 7 years after their DOFDs and a new loan, which will drop your average age of account.   It's not great for scoring purposes.

When I rehabbed, once upon a time, I couldn't afford the payments and the company worked with me to come up with something we were both OK with, so you can try to work with them and explain your situation if the repayments are truly too high.   If not, you may just have to tighten your belt a bit.

Since you are looking at a year out, now would be a good time to get a rehab rolling, because that might/should be enough time for everything to shake out on your credit report.


Consolidation would get everything straightened out a lot sooner, but you'll have a lot of negatives you can't remove, and I don't think it's the best option (here or in general).

Full disclosure: I've done both a rehab and consolidation; my consolidation is more recent (last year) and both were from defaults, so I have first hand experience with both.

Oct 2019


Garden goal: keep on keepin' on
Usually a faithful practitioner of AZE5or6or7; working on AZE1or2 and grumbling about it.
Message 3 of 5
New Contributor

Re: Best option for defaulted loans and future mortgage

Thank you both so much! This has been a lot to take it and try to figure out when I'm completely clueless about student loans. Everything you've both said makes perfect sense and we're definitely going to try and go the rehab route. Hopefully they can work with us on a decent payment amount.

Again, thank you both for the thorough info!!
Message 4 of 5
Valued Contributor

Re: Best option for defaulted loans and future mortgage

I'm glad we could help! We're here if/when you have more questions - good luck!

Oct 2019


Garden goal: keep on keepin' on
Usually a faithful practitioner of AZE5or6or7; working on AZE1or2 and grumbling about it.
Message 5 of 5
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