OK, let's start with logging in, in text mode with other characters
You can use left-ALT + 0xxx codes, I just tried ä (left) ALT+0228 in a password and that works from a text tty
See here: http://www.irongeek.com/alt-numpad-ascii-key-combos-and-chart.html the right column!
Can you login, in that way?
You can test the umlaut in the username field, to see if it appears and then of course type the real username