Is student loan forbearance seen as negative for home loan?

[Administrator]

Hello,I’m a newbie here at the forum. I've done a search on this topic, but didn't find any situations quite like mine, so I hope you don't mind my question.Long story short:In 2004, I began having some major medical issues and was unable to work for a 1.5 years. Because of the loss of my income, my husband and I declared Chapter 7 bankruptcy in 11/04 and were discharged in 2/05. When we declared BK, our student loans ($26,000 and $39,000) automatically went into forbearance, and we’ve kept them in forbearance since then so we could save some money in case a rainy day hit once again.Fast forward 3+ years: We are now back on our feet again financially, and we're hoping to buy our first home later this year. We assumed that we needed to put our student loans back into repayment so that potential lenders would see that we are paying our loans again. However, when I called Direct Loans (U.S. Dept. of Education) to do so, I was counseled against it. This obviously came as a big surprise! Basically, I was put on the phone with a veteran student loan officer, and he told me that banks typically do not consider it negative when student loans are in forbearance. He was most concerned about the interest charges that had accumulated in the past 3+ years, and the fact that they would be capitalized the minute we went back in repayment. In other words, we'll be paying interest on interest. He strongly recommended that we both stay in forbearance for as long as it takes to pay off the accumulated interest in order to prevent it from being capitalized. (He also actually recommended that I apply for an economic hardship deferment based on my low income and back date it 12-18 months in an attempt to override the current forbearance and shave off a few thousand in previous interest charges—but that’s another topic altogether.)Our dilemma:Our biggest concern is that we already have a big strike against us with the bankruptcy, so we don't want to do anything else to jeopardize our changes at getting a home loan. However, if banks truly don't care if our student loans are in forbearance, it would save us a lot of money if we stay in forbearance while paying off the accumulated interest as the loan officer suggested. Obviously, we'll be discussing this with potential banks, but I’d really appreciate all of your opinions on this!Here’s a bit more information about our situation in case it influences your answer:*Our credit scores range from 672 to 743 (my scores are 681-683-719 and my husband’s are 672-735-743), which is pretty good considering the BK.* My husband's parents will be gifting us the money for our down payment ($40K = 23%), so we're hoping this will help our chances at purchasing a home in the $160K-$170K range (loan amount of $120K-$130K).* My husband just started a new job in March after having been laid off last October (along with 300 other people). He makes $49K per year gross.* I’ve been self-employed since July 2006. My 2006 tax return shows a slight loss because of start-up costs; my 2007 tax return shows a profit of $7,000 after deductions; I am currently pulling in around $1,500-$2,000 before taxes each month. We're planning to submit information on my income for the loan, but we don't expect it to have much impact.* Debts: No credit card debt; 2 car payments (each $250), but one will be paid off in less than 9 months. Student loans will total around $500/month when we go into repayment.* We will only consider a 30-year fixed mortgage; no ARMs. Willing to pay 1-3 points to get interest rate in the 6% range.I look forward to hearing your opinions! Thanks in advance.Best regards,Becky


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(Source: mortgagefit.com)