Ask almost anyone between the ages of 22 and 42 and they will likely have some choice words about student loans. This type of debt can seem like a dead weight on your home buying dreams. Many millennials worry that it’ll be difficult to obtain pre-approval for a mortgage if the lender thinks you have too much overall debt. Here we lay out the cold, hard facts about student loan debt, its potential impact on your homebuying chances, and what you can do to increase your chances of getting a home loan.
Student Loan Debt Facts and Figures
Student loan debt is one of the most pressing issues for the newest and largest wave of potential home buyers: millennials.
Currently, the total student loan debt in the United States stands at $1.56 trillion. This amount is almost double the credit card debt in this country.
Nearly 20% of the US adult population, or almost 50 million people, have some form of student loan debt.
All of this is important when we look at homebuying – both in general and for millennials specifically.
Student Loan Debts Impact on Home Buying
In a recent study, 9 out of 10 millennials who currently rent dream of buying a home someday. However, that same study showed that only about 5% of those say they will be able to follow through in the next year.
In addition, home ownership rates for people between 24 and 32 dropped almost 10% in the 9 years between 2005 and 2014.
Various researchers and studies, including some conducted by the Federal Reserve, believe that student loan debt is to blame for a full 20% of that decline.
More than a third of millennials had student loan debt as of 2017 according the Fed, and the individual debt amount was “substantially higher for millennials in 2017 than for Generation X members in 2004.”
All of this combined means that many potential new homebuyers are facing monthly debt payments ranging from hundreds to even thousands of dollars on their loans.
All of this is factored into both their total debt and their debt to income ratio by mortgage loan companies.
This hefty monthly payment considerably diminishes a buyer’s purchasing power, in addition to making it difficult to save towards a down payment.
Don’t Give Up Hope On Your Home Buying Dreams Even With Student Debt!
If all of this data on student loan debt is hitting home, you still shouldn’t get discouraged! Though you’ll likely need to work a little harder to make sure that buying a home is financially feasible, it doesn’t mean your dream of homeownership is out of reach.
There are a number of options available to you if you dream of owning your own home someday.
(1) Refinance Your Student Loans
Though this is generally more effective for private loans, there are a number of companies and options that allow for you to refinance your student loan debt.
This could mean consolidating different loans into one payment, and potentially even lowering your payment depending on the interest rate.
If you have private loans or a lower amount due, this can be a smart option in order to pay them off faster.
(2) Pick A Type of Mortgage With A Low Down Payment
But even if you owe a larger amount in debt or you have federal loans that make it difficult to refinance, there are ways to save for a home.
While it’s true that for a conventional mortgage, you may need a significant down payment, there is also the option of an FHA loan. For buyers that do not have a ton of cash to put down, an FHA loan might be a better option. For this type of loan, you only need 3.5% to put down. However, it does require you have much of your other financial past in good order.
(3) Make Sure The Rest of Your Financials Are In Great Shape
If you know you want to buy a home and you know you’ll still have a large amount of student debt when you do so, then you absolutely need to get all of your financials in excellent shape to give yourself the best chance of securing a loan.
You’ll need a good to great credit score and proof of employment and income to start. If your credit score isn’t great, this is the time to work on fixing that, even if you can’t make a huge dent in your student loan debt. Ideally, try and pay off your credit cards and other debts that you may have so that the only debt on your balance sheet are your student loans.
These steps should then put you in a much better position to be approved.
All Hope Is Not Lost
Student loan debt is a burden on many millennials and can create potential problems when you’re hoping to buy a home. But rest assured, you can absolutely still be approved for a home loan to purchase your dream house, even with a large amount of student loan debt. However, you’ll need to make sure your other financials and budgets are in order before you can move forward.