A recent study by Goldman Sachs Group Inc. reported that graduates with a debt burden greater than $25,000 are less likely to own a home compared to those with smaller financial burdens. Millennial’s are stricken with high debt levels, which have in turn offset any financial gains from obtaining a college degree. Fortunately, Goldman suspects this negative effect will subside as the millennial generation gets older and enters the housing market. On the issue, 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, a student loan 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. This is one of the most important factors a bank will consider when buyers are applying for a mortgage. This is also how lenders/banks 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 increased likelihood you have of receiving 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. 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 would be beneficial to pay off those loans before buying a house or refinance them to a better rate. Now, if you are unsure whether your student loan interest rates are high, check out Credible’s handy tool to compare your rate. 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 payment. 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.
If you are already behind on your 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.