OLD Student Loan--decision on how to address before home loan application

[ljanelle]

I am helping a friend to prepare to buy a home/land.  We need to deal with an old student loan, but there are some other issues related to income and building credit, as well.

First the student loan, which is reported like this:  

Account: U S DEPT OF ED/GSC/CHI

Acct #: XXXXXXX

Type: Installment

	Bureau	Bureau Code	Date Open	High Limit	Monthly Payment	Account Balance	Last Reported	Account Status	Amount Past Due
	Experian	I	09/1991	$2,650	-	$3,600	06/2012	UnPaid	$3,600
	Comments: Experian  Experian Student loan permanently assigned to government

	Bureau		Days Past Due	History Date	24 Month History
	30	60	90+
	Experian		0	0	0	06/2012

It is only reported on Experian, not TransUnion or Equifax.  It is an old loan that she defaulted on and has not paid on in some time and she has flown under the radar with regards to income/location/etc. so it does not appear there has been any collection effort in years.  She now has the money to pay off or settle this debt in preparation for purchasing a house and I am trying to help advise her on the best strategy.  Would it be best to negotiate a settlement, pay in full and negotiate removal from the credit report (if that is even possible)?  Or would it be better to do the rehabilitation that I have read about?  I am worried that we could make a misstep that would negatively impact her credit score.

Now on to the broader questions, which I may need to post on another board as well but I thought I would go ahead and throw out here.  This is one of only two items appearing on her credit report (the other is a department store card in good standing last reported in 2005).  The score reported on the free consolidated report is about 630.  She has about $70,000 in cash saved to put towards down payment and closing costs, and is looking at properties in the $150k-250k range.  The challenge is that she is self-employed and her work has been cash basis, under the radar with no tax returns filed.  What is the best strategy for building credit and income record so she can qualify for a loan?  She has had trouble getting even a department store credit card issued to build credit.  Is there a secured card she should consider first?  Does she need to file back income taxes to show enough income to make payments?  

I know how to manage my own very vanilla credit scores but her situation is an unusual one.  Thank you!

[InvincibleSummer3]

You have two issues here: one is the default, and how to address that. The other is the fact that she has very little credit history. In this case, given that both of these are factors, I would say rehab might be a good way for her to go, as once the 9 months of payments are done, the loan will be picked up by a new lender and the new tradeline will show "pays as agreed" all the way back to the date of her default. This would certainly help given that she has a thin credit history.

Secured cards would be a great way for her to build some history, given that she has quite a bit of money saved up.

I don't know the answer to your tax question, though.

[stpn2me]

My wife is in the exact same situation. She has a student loan to the tune of about $10K that she hasnt paid in about 15 years. It has fallen off her credit reports such that when I ran her credit a few days ago, all of them are in the 760+ for all three credit bureaus. I know that if we pay it now, it will report and drop her score. She doesnt have income as she has beena stay at home mom for the last 15 years.

[InvincibleSummer3]

Why would it report if you paid? And if your wife has a 760+, it's not quite the same situation as ljanelle' s friend. Are you and your wife thinking about buying a house too?

[SCF]

I believe that federal student loans can reappear on your credit reports after an absence, because they can be collected on indefinitely.  The government just has to assign them to a new CA and that CA can report.  The original tradeline leading up to the default should never reappear though, because it has long since aged off, and rehab would remove the CA account, and give you a backdated tradeline for the new lender, a nice bonus for a loan that old.  A federal loan default would also still be in CAIVRS, limiting her access to other federal programs like FHA loans.  I also believe that your Social Security can be garnished to pay back student loan debt, so it would probably be worth rehabbing and taking care of this loan if possible to avoid trouble in the future.

If it is a private loan, then chances are that it's outside the statute of limitations and can't be collected on anyway.

[JBinBigD]

I had a similar situation with an old defaulted loan.  I rehabbed it last year with 9 on-time payments and it got picked up by a lender and put in good standing.  It was so old it had fallen off my credit report, but was preventing me from getting an FHA loan.

Your friend may be able to get a conventional loan with enough money down.  Not sure what banks would think about the defaulted student loan and 630 credit score though. 

My advice would be go through loan rehab over the next 9 months, wait for the loan to appear on CR which will increase score then get a conventional mortgage with a lot of money down and low interest rate.  Doubt there's much other option.

[kjel]

The loan is going to pop up in CAIVRS so if your friend is thinking about financing with a government backed/insured loan it will pop up. It looks like it is a small amount so it would be worth her while to take care of it.

Your friend is going to have other issues getting underwritten for a loan even with a conventional loan because her credit file looks thin on the surface and her score is low. Also understand that if she or her business has not filed taxes it's a little difficult to substantiate income which underwriters want to see.