Student loans are a necessary evil for many college students. The long life of these loans can affect students into middle-age and may play a role in determining eligibility for large purchases like a home loan. Forbearing student loans to avoid payment may have an impact when attempting to secure a home loan depending on the overall payment history of the loans and how lenders report the loans to credit bureaus.
Student Loans and Credit
A forbearance on a student loan should not have any adverse affect on your credit score. If your credit score is all a mortgage lender is looking at to determine your eligibility for a loan, the forbearance should have no impact on your ability to secure the home loan. Taking on additional debt does not affect on the status of your student loan's forbearance status, although you must remember to begin making payments once the forbearance expires. Failing to make payments once the forbearance ends could affect your home loan if the approval is still in process.
Close Credit Examination
Many mortgage lenders, in the wake of the mortgage crisis of 2009, closely examine a potential borrower's credit report to determine if the candidate can actually make continuing mortgage payments over the life of the loan. A forbearance on a student loan may signal a period of financial difficulty to your potential lender, which may make them hesitant to offer you a home loan. You may have to show additional documentation, including proof of income, to ease the lender's doubts and secure your mortgage.
Capitalized Loan Interest
Your lender capitalizes interest that goes unpaid on your student loan over the forbearance period. This means the interest adds directly to the balance increasing the overall amount you have to repay. Overtime, this can increase your debt-to-income ratio, which can hurt your credit score. According to Bankrate.com, a debt-to-income ratio over 30 percent or higher can significantly damage your credit score and hurt your chances of securing new lines of credit, including a home loan. Paying student loan interest during the forbearance period can help you avoid interest capitalization.
Student Loan Reporting
The affect a forbearance has on your credit score ultimately depends on how your student loan company reports the loan's status to credit bureaus. If your lender reports the loan as "on-time" or "never late" this is a positive. If your lender chooses to make no payment notation at all on the account, the credit bureau may view this as a negative, which can actually damage your score. The Fair Credit Reporting Act allows you to dispute a false or misleading notation on your credit report and compel the bureau displaying the notation to investigate its validity. Make sure all notations on your credit report are correct before applying for a home loan.