Housing News

Student Loan Delinquency: A New Barrier to Homeownership

Millions of student loan borrowers are facing a new financial roadblock that could impact their ability to become homeowners.

As the federal government resumes student loan collections following a years long pandemic pause, many borrowers who’ve fallen behind are now seeing their credit scores drop, their wages garnished, and are putting their plans to buy a home on hold.

For some, the hit has been severe enough to disqualify them from getting a mortgage entirely—even those who were otherwise ready to buy.

“Borrowers paying their student loans through wage garnishment will face a reduction in their income on tax returns due to the garnishment,” said debt relief attorney Leslie Tayne, founder of Tayne Law Group. “This may lower their income so much that they don’t qualify for a mortgage loan. Or the terms of the loan will be difficult to manage.”

Many student loan borrowers are struggling to get mortgages

 The federal government had paused student loan collections during the pandemic. Collections resumed on May 5.

Roughly 5 million borrowers have not made a monthly payment in more than a year, according to the U.S. Department of Education. Another 4 million borrowers are 91 to 180 days late on their payments.

This is already affecting these borrowers’ ability to purchase a home.

New American Funding (NAF) loan officer Mosi Gatling, who is based in Las Vegas, had three clients who were unable to get a mortgage after the changes. Gatling is also the senior vice president of strategic growth and expansion at NAF.

One client lost 85 points on their credit score. Another client’s score dropped 60 points.

“All three were disqualified for a mortgage,” said Gatling. “And all three would have been first-time homebuyers.”

Among those three clients was a 27-year-old who had savings in the bank and enough funds for a down payment. He was reported to the credit bureaus for owing about $200 on student loans.

“His credit score had dropped to 479,” said Gatling.

Unable to qualify for the mortgage he had wanted, he renewed his lease on a rental.

How delinquent student loan borrowers can get back on track

Even if your homeownership plans need to be temporarily put on hold, there are steps you can take to get back on track.

You should start by contacting the loan holder to find out if you can qualify for a new repayment schedule. This may allow you to reduce the amount you owe every month while stretching out the length of the loan.

You may also be eligible for a loan consolidation. This is when you roll multiple student loans into one loan with just one monthly payment.

Loan rehabilitation programs may also help get would-be homeowners back on track.

Rehabilitation can help remove garnishment from a borrower’s credit report and halt the garnishment after several on-time loan payments have been made, said Tayne.

"It will take some time, but rebuilding your credit profile after having wages garnished is the best thing borrowers can do if they hope to qualify for a mortgage in the future,” said Tayne.