How Your Student Loans May Affect Your Ability to Get a Mortgage

More than 9 million Americans may see “substantial declines” in their FICO scores as delinquent student loans begin showing up on credit reports for the first time since the pandemic, according to a new report by the Federal Reserve Bank of New York.

 

If you are shopping for a home and have been pre-approved prior to a student loan delinquency, your pre-approval may no longer be valid. Your credit score is a vital aspect of the home financing process, which is why it’s important to take steps to ensure your student loan payments are current and sustainable. 

 

Over 15% of Student Loan Borrowers Behind on Payments, Substantial Effects on Credit Scores

 

It’s been a long time since federal student loan borrowers have needed to worry about the consequences of missed payments, which can extend to decreasing credit scores, and the garnishment of wages and retirement benefits. 

 

Student loan collection activity was suspended during the pandemic, and the relief period officially expired on Sept. 30, 2024.

 

A recent report conducted by the Federal Reserve Bank of New York finds that over 15% of all student loan holders are likely now behind on debts. Those affected could face a tougher time getting access to home or auto loans or see their credit card limits lowered.

 

The New York Fed’s researchers also found that a student loan delinquency can knock more than 150 points from the FICO score of someone with around average credit.

 

The expected drop was highest for borrowers who start with the best scores. Among those with scores under 620, the reported new delinquency could lead to an average 87-point decline.

Given these estimates, more than nine million student loan borrowers face substantial declines in credit standing over the first quarter of 2025.

 

The aggregate effect on overall credit access will largely depend on the previous credit standing of those with past due loans, but may result in reduced credit limits, higher interest rates for new loans, and overall lower credit access.

 

How Student Loan Borrowers Can Protect Their Credit

 

Student loan borrowers struggling to make consistent payments have options to stay on track and protect their credit. 

 

Borrowers can apply for an income-driven repayment plan, which will cap their monthly bill at a share of their discretionary income. Many borrowers end up with a monthly payment of zero.

 

The Education Department recently re-opened several IDR plan applications, following a period during which the plans were unavailable.

 

Borrowers can also apply for a number of deferments or forbearances, which can pause your payments for a year or more. It may show up on your credit report that you’re not currently making payments on your loan, but you shouldn’t be flagged as late. 

 

Visit Studentaid.gov to determine your student loan servicer and the best repayment options for your circumstances. 

 

Closing Thoughts

 

If you have missed student loan payments, check your credit reports regularly for free at AnnualCreditReport.com to make sure all three credit rating companies, Experian, Equifax, and TransUnion, are showing your correct student loan balance and payment status.

 

Your student loans don’t have to become a barrier to homeownership. If you’re currently shopping or planning to buy a home in the near future, give us a call or visit us online to learn more about your home financing options today!