A recent study by Goldman Sachs Group Inc. found that graduates with a debt burden greater than $25,000 are less likely to own a home compared to those with smaller financial burdens. Many millennials are stricken with high debt levels, which can offset financial gains from obtaining a college degree.
Fortunately, Goldman analysts suspect this negative effect will subside as the millennial generation gets older and enters the housing market. There are two opposing views of the actual impact of student loans on the mortgage market. On the one hand, if you have no credit history, student loans can help establish good credit as well as help educate borrowers on how to make wise financial decisions. On the other hand, student loans can decrease your purchasing power early on in your career.
How student loan debt affects mortgage lending
The first thing for prospective homeowners to understand is their debt-to-income ratio, or DTI. This is one of the most important factors a bank will consider when buyers are applying for a mortgage. This is how lenders calculate your ability to pay off a new loan. It is determined by adding up your total monthly debt (including the projected mortgage payment) and then dividing by your total monthly income. The lower this ratio is, the greater likelihood you have of being approved for a mortgage.
Your credit score is another important factor when a bank is assessing your candidacy for a mortgage and competitive interest rate. Paying your loans on time is a great way to build credit and a strong credit score. Missing, skipping or defaulting on a loan will impair your credit score and prevent a bank from granting a mortgage loan.
If you think you are ready to buy a home
Which comes first, the down payment or paying back loans? Saving for a down payment can seem daunting while still repaying your student loans, but it can be done. A number of state programs provide down payment assistance to first-time homebuyers — some are even geared specifically for student loan borrowers.
If you’ve already saved up, think about whether you want to use that money for a house or to pay off student loans. If you have high-interest student loans, it might be beneficial to pay off those loans before buying a house. Or your might be able to refinance your student loans at a lower rate.
If you’re not sure whether your student loan interest rates are high, you can use Credible.com to request personalized rate quotes from multiple, vetted lenders in minutes, without affecting your credit score. If you have low interest loans already, consider putting that money down for a house. Just like your student loans, make sure that you believe you can make your monthly payments long term.
If you need financial assistance
There are some tips and tricks for graduates who hope to buy a house regardless of the amount of debt you carry. First and foremost, avoid delinquency at all cost because it will affect your credit score. Delinquencies are determined differently for federal and private student loans; federal loans usually have a 60-day grace period of no payment while private loans can be declared delinquent after only one-missed payments. The second is to defer student loan payments, or change your repayment plan, when preparing to apply for a mortgage. With a federal or private student loan consolidation, you can change your repayment length and thereby reduce your monthly payment and lower your debt-to-income ratio.
Credible is a marketplace where student loan borrowers can compare refinancing offers from multiple lenders. Credible users who refinance into a loan with a longer term typically lower their monthly payment by around $218. At today’s interest rates, a borrower who prequalified for a $300,000 home loan could boost their mortgage borrowing limit to about $350,000 by trimming their monthly student loan payment by $218 a month. In many parts of the country, refinancing student loan debt could be the key to avoid being priced out of the market.
Refinancing with a private lender is not for everyone — those who take this route will lose borrower benefits that only come with federal loans, such as access to income-driven repayment programs and the possibility of loan forgiveness after 10, 20 or 25 years. But after weighing the pros and cons, a growing number of borrowers are making the refinancing leap.
If you all already behind on your student loan payments or fear it may come to that, there are other alternatives. The first step is to contact your loan holder to see what your options may be. It is possible to correct any issues and bring a loan out of default and back up to date by deferring payments or switching plans. Learning as much as you can about your student loans can help create a more stable financial further and put you one step closer to home ownership.
To learn more about your student loan options, visit Credible.