Homeownership seems more difficult for those making up the “Millennial” demographic. The milestones typically awaiting a young adult including marriage, children, and a home, are put on the back burner until a plan is set in place to manage the level of student debt. Often, this equates to over $40,000 for a majority who have spent four years or more earning their degree.
Buying a Home
In an ideal world, financial knowledge is taught from a very young age.
However, the reality for most people is that financial knowledge about homeownership does not set in until the late 20s or even early 30s. And, techniques for purposeful debt management start usually around the time you start hunting for your first home — and then you are left coming up with a plan when you are not very prepared. This can lead to some disappointment and rejection.
On a psychological level, this can cause many Millennials to lose faith in the financial system. So, the best way to counter this feeling of angst is to be prepared and have a plan for your debt after graduation.
For lenders, there are two classifications considered by lenders for approval:
The front end of the application
On this end, the lender is calculating how the housing costs you accrue compare to your level of income. The housing comprises payments including principal and interest, property taxes as well as insurance for a total aggregate cost. Lenders for the majority want this to fall under 28% of what you make for a living. Student loans are not considered in this ratio, only housing and income.
The back end of the application
Here is where student loans have the potential to affect this ratio. It compares total obligations against your income level. It also includes housing as described in the first ratio plus all other monthly debt. Lenders want this to fall under 36%.
- The Federal Housing Administration typically guarantees FHA loans for a maximum of 43%. If your student loan debt is substantial with a high monthly payment, it would have a bearing on this ratio and would affect the approval of a mortgage loan.
Considerations When Attempting To Buy a Home with Student Loan Debt
In attempting to buy a home when you are in debt for student loans, these can affect the outcome. But these are not always what disqualifies. Some lenders don’t consider these in their determination if your ratios are good. Some other things you need to work on to make sure they meet guidelines include:
The Credit Score
Lenders will look at your credit score as a key factor when making their ultimate decision. In most instances, a score of approximately 600 is required for a conventional loan, but if you want to try for an FHA, you can typically get a home with a score as low as 500.
The issue with that is the interest rates. The lower your score, the higher rates you will pay. Raising the score not only improves these rates, but it gives you a better chance at a mortgage despite student loans — read more here.
Income Level and History of Employment
The more money you make, the greater confidence the lender has that you’ll repay the loan. College graduates will most often earn substantially more than those who haven’t earned a degree. Thus, your diploma could give you a “return on your investment” and hopefully offset some costs from your loans. The important thing is to show a stable history of employment with at least a year at the same company.
The Down Payment
It’s difficult to save money when you pay out a lot in bills, but it’s vital to provide a significant down payment when you try for a mortgage loan. Most lenders ask for 10-20% for conventional loans but for someone who tries for an FHA, you can go as low as 3.5%. Again, if you don’t put much down for a down, it will show up in other areas like interest rate and a higher monthly payment.
These are all things that you need to work on aside from your student loans. If these are all in good standing, a mortgage loan is a very good possibility despite this debt. But if you have the loans and you’re not looking fantastic, there are things that you can do to try to make improvements.
Tips Toward Achieving Your Home Ownership Goals
If you have a strong desire to buy a home but you are hindered by student loan debt, there are things you can do to improve your situation to secure a mortgage. The basics are this:
- Improve your overall credit score
- Save for your down payment
- Pay down your debt including student loans
Now, if you are already doing these things, here are some other ideas about ways to improve your chances of getting approved:
Refinance Your Loans
You might be able to qualify for a better rate with lower payments on your student loans. This has the potential for decreasing your overall debt ratio. This step is something you want to give careful consideration. If refinancing is going to prolong the duration of the loan, you could end up paying even more on the loan.
Assistance with the Down Payment
There are organizations that offer assistance with down payments for mortgages either through the government or your community or even nonprofits. These are more often available for first-time buyers and those in a lower-income bracket. Government-guaranteed loans are available for lower down payments in the form of FHA, VA, and USDA loans.
When you have extensive debt including student loans, buying a home is challenging. You should start small and build up to your dream home over time.
An investment in a small home will allow you the comfort of saving, taking time to create value in the home, and working towards a goal of achieving greater success with employment to pay off some debt you currently have. It puts you in a much better position for the future. And you can still call yourself a homeowner.
Student debt will not keep you from purchasing a home, but you do have to manage it. It’s just a matter of making sure you don’t have other obstacles standing in the way of the mortgage process in addition to the loans. It’s not easy. It is stressful. It’s important to take small steps and go gradually to keep it from becoming overwhelming.
Don’t Give Up
When you set doable goals for yourself instead of overextending with what seems unattainable dreams, it’s not so self-defeating. You may have to work a little harder when you get out of college and it may not be the dream you anticipated when you left high school. But the things you want are still out there, and they’re not impossible. You just have to keep pursuing them with that same drive and not allow yourself to give up on those things that you most want. Go and get them.