The Wall Street Journal recently reported that 43% of the 22 million people with federal and private student debt are not making their monthly loan payments. This includes those who are in default (more than twelve months late), delinquent (more than one month late), or received permission to postpone their payment due to economic hardship. It’s no wonder lenders have tightened their related underwriting requirements!
Some say the consequences of simply assessing a higher default rate of interest is not harsh enough. Others say student borrowers are more apathetic now because they are in the same boat with 10 million others – and the problem is just too large to penalize everyone.
A lender cannot generally repossess a borrower’s car or other assets in the event of a student loan default. But to recoup losses, the government is now garnishing wages and withholding tax refunds once students commence a job after graduation.
When seeking mortgage pre-qualification, applicants have not been required to include deferred student loan payments in their debt-to-income ratio calculation – provided the deferral was for more than 12 months beyond the proposed mortgage closing date. Now, FHA lenders will generally use the known monthly payment or 2% of the student loan balance – versus conventional lenders using the greater of the actual monthly payment or 1%. Assuming a $37,000 deferred loan (the average U.S. student loan balance today), suddenly having to include a 1% or $370 monthly projected payment would certainly have an adverse effect on a mortgage qualification ratio.
It is surprising how many people have zero remorse after a foreclosure. There are those who think nothing of going through the process again to advance their self-interest, with little regard for either their ability to repay or their reputation with a lender. For this reason, lenders do not zealously arrange mortgages for post-foreclosure loan applicants without a thorough screening process.
It doesn’t take long to deduce moral character and integrity. If it is evident the “incident” will never happen again, there are reputable private lenders who are willing to provide a new mortgage – even one day after the foreclosure is finalized (at interest rates that are reasonable under the circumstances).
The Federal National Mortgage Association (FNMA), the ultimate buyer of a conventional loan advanced by a mortgage lender, requires borrowers to wait seven years after title has transferred in a foreclosure proceeding. However, the Federal Housing Administration (FHA) requires that just 3 years elapse before they insure the mortgage advanced by an FHA lender – whereas the Department of Veterans Affairs (VA) needs only 2 years to elapse before guaranteeing the mortgage of a VA lender.
As long as the Certificate of Title is produced evidencing that the 3-year anniversary requirement has been met, a post-foreclosure borrower may obtain an FHA mortgage. And the loan application can be made in advance so that borrowers are ready and able to close on a timely basis, regardless of how the foreclosure is reported on a credit report by the credit bureaus.