One of the benefits of government-backed home loans is that they tend to have more flexible and forgiving requirements when it comes bankruptcies, foreclosures and other derogatory credit.
The wait time for a VA or FHA loan in the wake of one of these events can be considerably shorter than for conventional financing.
But that flexibility can disappear in a hurry if your bad debts are federal ones. Default or delinquency on federal loans can delay or derail your shot at landing another government-backed loan, including home loans.
A Clear CAIVRS
If you're on the hunt for a government-backed home loan, mortgage lenders will run your name through a specialized database that tracks tax liens, defaults and delinquencies on a host of federal obligations.
The Credit Alert Interactive Voice Response System, or CAIVRS, is maintained by the U.S. Department of Housing and Urban Development. This database logs current delinquencies and defaults and foreclosures within the last three years on a range of federal debts.
Government agencies that may report to CAIVRS include:
- Department of Agriculture
- Department of Education
- Department of Housing and Urban Development
- Department of Justice
- Department of Veterans Affairs
- Federal Deposit Insurance Corporation
- Small Business Administration
Federal student loans and FHA loans are two of the most common sources of CAIVRS hits. The Internal Revenue Service doesn't report to this database, although federal tax liens will show up on credit reports and can make it more difficult to obtain a loan. (You can get free annual credit reports under federal law.)
Potential homebuyers who discover their name is in CAIVRS should first check to be sure they haven't wound up there by mistake. Whether a government agency made a mistake processing a payment or HUD failed to remove your name from the list following corrective action or the end of a required waiting period, inaccuracies aren't entirely uncommon.
Borrowers can't access the CAIVRS database themselves, so talk with your lender about how best to proceed if you're surprised to hear you're on the list.
For those rightfully in the CAIVRS system, your options may be limited. You'll need to have a clear CAIVRS record in order to close on a government-backed mortgage.
Clearing Your CAIVRS
If you've defaulted or are delinquent on federal student loans, the ideal solution is repaying the debt in full. That's also not a realistic solution for many would-be borrowers. The more common path to regaining loan eligibility is establishing a repayment plan with the debt holder.
Lenders and loan programs can have varying requirements. Mortgage lenders will factor those new student loan payments into your overall affordability picture. If you're not able to show at least 12 months of on-time payments under that repayment plan, the outstanding balance may count against a lender's cap on derogatory credit.
That alone can make it tough to qualify for home financing. This year's average college graduate has about $35,000 in student loan debt, according to education planning hub Edvisors.
For homeowners who lose a government-backed loan to foreclosure, the only real option is to wait it out. There's typically a three-year seasoning period from the date the government agency pays a claim on your foreclosure.
Consumers will often need to spend some or all of this time rebuilding their credit. How far your score falls depends on a host of factors, including what of credit you had before the delinquency or default. You can get a free credit report summary, updated monthly, at Credit.com.
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