Home concept,Businessmen holding home keys
Many people entering the traditional home-buying years already have debt – student loans, of course.
And those loans can make landing in a new house trickier.
“Although many Americans have student loans, mortgage companies will still evaluate these outstanding debts while making their decision to approve or deny these borrowers,” said Elaine Griffin Rubin, senior contributor and communications specialist at Edvisors.
Today, more than two-thirds of college graduates have student debt, compared with less than 50% in the early 1990s. And, back then, the average balance was $9,000 – now it’s $30,000. The typical monthly bill is nearly $400. Americans are now more burdened by student debt than they are by credit card or auto debt.
The results are in: As debt rises, young homeownership rates are falling. For every 10% in student loan debt a person holds, their chance of home ownership drops 1 to 2 percentage points during their first five years after school, according to the Federal Reserve. More than 80% of people aged 22 to 35 with student debt who haven’t bought a house yet blame their educational loans, according to the National Association of Realtors.
Still, it’s entirely possible to get a mortgage while juggling student debt, experts say.
The student loans will affect your eligibility for a mortgage in two ways, said Mark Kantrowitz, the publisher of SavingForCollege.com.
For one, your payment history on the loans will impact your credit score, he said.
If you fall behind on your monthly bills to your servicer, expect your score to drop.
“This can reduce your likelihood of loan approval and increase the interest rate you pay,” Kantrowitz said.
As you save up for a down payment, or get ready to apply for a mortgage, staying current on your student loans will be important.
Your monthly payment will also be factored into your debt-to-income ratio, which lenders use to measure your ability to keep up with mortgage payments.
“There are limits on the percentage of your income that can be devoted to repaying all debts, including student loans,” Kantrowitz said.
Therefore, you may want to consider switching into a student loan repayment plan that lowers your monthly obligation, such as the extended repayment plan or an income-driven one. (Fannie Mae, the federal mortgage giant, made it easier for student loan borrowers to get a mortgage in 2017, by allowing lenders to consider their lower, flexible payments on these repayment plans.)
Kantrowitz recommends borrowers change their repayment plan at least a year before they apply for a mortgage.
Owning a house will not impact your monthly student loan payments on an income-driven repayment plan, said Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that helps student loan borrowers with free advice and dispute resolution.
That’s because the plans, Mayotte said, “are based only on income and family size, not on assets or other debts.” (Mayotte’s organization will soon be hosting sessions in Boston on how student loan borrowers can become homeowners.)
Various government agencies that back mortgages, from the U.S. Department of Veterans Affairs to the U.S. Department of Agriculture, will use different formulas to calculate how much of a burden your student debt poses. As a result, Kantrowitz said, “it might be helpful to use a mortgage broker who works with all of the different government programs.”
On the other side of the balance sheet, if you plan to soon buy a house, it’s a great time to try to lift your income, “especially if you think you deserve a raise or promotion,” Griffin Rubin said.
“If this isn’t an option, it may be time to see if you have the ability to earn extra money with a second job,” he added.
Avoid deferments or forbearances in your lead-up to homeownership. While they’ll bring your monthly payment down to zero, they signal financial hardship to lenders, Kantrowitz said.
Several states have put into place programs to ease the burden of student debt, making homeownership more possible.
If you’ve defaulted or fallen behind on your student loans, getting a mortgage will be more difficult, Kantrowitz said. Such borrowers might want to see if a parent can buy the house.
If the property is bought through a trust, the child will inherit the house when the parent dies. (There are also, of course, a number of ways to climb out of the red and become current on your loan again.)
Another option: You can apply for a mortgage with another person. That will show a higher income, and you’ll have another credit score to rely on.
“It may be worth it to borrow the mortgage with your spouse,” Griffin Rubin said. “If you’re not married, maybe your significant other, family member or friend may be a choice for you.”
In the end, if you’re having a hard time finding a bank that will work with you, “the answer will be clear,” Griffin Rubin said. “Focus on paying down debts.”