How Student Loan Debt Affects the Homebuying Process

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Student loans prevent many would-be first-time homebuyers from purchasing a home. In addition to delaying homeownership, those burdened by student debt postpone other major life choices, such as marriage and starting a family, more than previous generations. Student debt keeps many individuals from investing in their future, but it also has negative effects on the economy. The unwillingness or inability of borrowers to become homeowners stops them from investing in one of the most important assets for building wealth – a home. And although education has long meant social mobility, today, the cost of education may actually impede on financial success.

Student Debt the "New Mortgage"

The first-time homebuyer market greatly relies on the ability of 20- and 30-year olds to purchase homes. But even well-paid, hardworking graduates find they can't save up for a home, as they're already making payments on school debt that are similar to that of a mortgage. Student loan borrowers who would have otherwise purchased a home sit on the sidelines in greater numbers than ever because they can't qualify for a home loan or they feel the need to pay off their debt before taking on a house payment. But the fact that first homes won't be purchased by these buyers may impact more than the individuals themselves. A 2015 survey by the nonprofit American Student Assistance points to student debtors' hesitance as a factor that slowed the housing recovery after the Great Recession.

Student Loan Stats

More than 40 million people deal with student loan debt, according to a report by the the ASA. Student debtors' total debt load exceeds the entire nation's credit card debt load for the first time. Graduates in 2016 carried a little more than $37,000 on average in student loans, according to Student Loan Hero. The average monthly payment for borrowers in their 20's was about $350. About one-quarter of borrowers are on 10-year repayment plans with fixed payments. The next most popular plans are income-based, meaning the monthly payment is capped at 10 percent of income; the graduated repayment plan, which increases payments over time; and a fixed payment lasting more than 10 years.

How the Debt Hurts Purchase Power

Student loans are a long-term commitment that usually last 10 or 20 years, meaning that if a borrower is willing to take the first step into home ownership and qualifies for financing, they must buy a home that's cheaper than they could otherwise afford if it weren't for student debt. That's because purchase power – the maximum home purchase price a buyer qualifies for – is based on debt-to-income ratios, which compare monthly debt payments to monthly income. Lenders usually approve borrowers that have no more than 36 percent debt-to-income ratios.

If you plan to buy a home with student loans in repayment that take up 10 percent of your monthly income, your purchase power just went down 10 percent. Since your purchase power is the price range you can afford, your choice of homes, and most likely, the number of homes available to you, are also undermined by student loan debt. Due to prices in some high-cost areas, a borrower may find themselves completely priced out of their current market and need to relocate to more affordable areas in order to become homeowners.

Mortgage Solutions for Student Debtors

Certain mortgage lenders and loan programs provide flexibility for applicants with student loan debt. For example, the Federal Housing Administration, or the FHA, allows higher DTI ratios, with some lenders allowing ratios as high as the 40- and 50-percent range. Although a lender may be willing to finance a borrower with a higher debt load, it's not necessarily in a borrower's best interest to use such a high portion of their income solely for housing. Another way a borrower might get their foot in the door is with a minimal down payment requirement. For example, the FHA requires only 3.5 percent down; the Department of Veterans Affairs, or the VA, offers military zero percent down; and conventional Fannie Mae and Freddie Mac loans may require as little as 3 percent down. The amount you qualify to put down and the DTI a lender will accept depend on a number of factors, including your credit score and your overall financial situation.


About the Author

Karina C. Hernandez is a licensed real estate agent since 2004 in San Diego. She has written legal articles pertaining to housing and real estate for multiple internet channels over the past 10 years. She has a B.A. in English from UCLA.