Every year the National Association of REALTORS® (NAR) puts out a report on Home Buyer and Seller Generational Trends. It doesn’t come as much of a surprise that the largest group of home buyers from 2019’s report are younger and older millennials combined. However, it was also found that Gen Xers & older millennial buyers, which are those born between 1980-1989, carry the highest median student loan amounts.
As an “older millennial” myself who pursued a graduate degree, I can totally understand the burden of high student loan debt and how that can make someone feel like buying a home might not be an affordable option – but that is not necessarily the case!
DISCLAIMER: I am not a mortgage/credit/financial professional and I cannot give financial advice. You should always consult with a mortgage/finance professional about your specific situation to see what options you may have available to you. (If you don’t have one and you’re in the Pittsburgh area, let me know and I can hook you up with some referrals!) The information below is general info meant to let you know that you have options that you should consult with a professional about if you are concerned about your ability to purchase a home because of student loan debt.
Myth #1: I can’t afford a home if I have student loan debt.
Truth #1: When it comes time to look at housing affordability and getting a mortgage, you will go through a pre-approval process with a mortgage lender/broker to determine how much home you can afford. In doing so, they typically will calculate your debt-to-income ratio, which looks at how much overall debt you have compared to your income. This usually looks only at recurring debts, such as credit card payments, student loan payments, car payments, etc. It will be up to you to also deduct other expenses you may have monthly, such as gas, groceries, recreation, etc. to see what number you are comfortable with spending as a monthly payment. That will help you and your lender to determine a price range for homes that you should be looking at when you are ready to make that leap.
Myth #2: I need to have a 20% down payment saved up before I can buy a home.
Truth #2: Not true! Right now, mortgage rates are continuing to stay lower and mortgage lenders are able to offer a variety of different loan options that provide the ability to have much lower down payment requirements. There are some first-time home buyer loan programs out there that require as little as a 3% down payment, and if you would qualify for a VA loan, or a USDA loan in a rural area, you could get a loan with zero down! Now, keep in mind that if you aren’t putting 20% down, your mortgage will likely have mortgage insurance attached to it, or PMI, which will add to your monthly payment amount, which is something to take into consideration; however, when student loan debt is preventing you from being able to save up enough to have 20% down, these types of loan programs can be appealing to those who want the opportunity of home ownership sooner rather than later. You also have the option of asking for seller’s assist with closing costs, anywhere from 3-6% depending on the type of loan, which helps you to need to bring less money to the table at closing.
Myth #3: My credit isn’t high enough to qualify for a mortgage because of student loan debt.
Truth #3: Student loan debt is typically seen as “good debt,” but only if you are making your payments on time. If you are someone who misses a payment here or there, or has possibly defaulted on your loans, then yes, your credit score has likely been negatively affected. Your best option in this scenario would be to reach out to someone who does credit repair or your mortgage professional so they can advise of some ways that you can improve your credit score. Often times it can be helpful to try to pay off higher interest rate loans first, looking into consolidating or refinancing loans for a lower payment, or pursuing an income-based repayment plan. Bringing down the monthly cost of your student loan payments may help you to be able to pay your loans on time, and then to be able to afford more of a mortgage payment when you are ready. Most loans do require a certain credit score threshold, so if you don’t know what your credit score is, I would encourage you to find out and then talk with a financial expert about any concerns that you have to work towards increasing it.
Overall when it comes to buying a home, student loan debt doesn’t necessarily have to be a barrier to you achieving that vision for yourself. Most of us have this debt, and will for a very long time yet, so it’s better to recognize what your limitations may be. You should really take an in-depth look at your spending habits, your job stability, and if you’re willing to sacrifice some other areas of your income to support making a monthly mortgage payment. Have an honest conversation with yourself about whether it makes sense for you to take on two large monthly payments – student loans and a mortgage payment. If after consulting with a mortgage/financial professional it does, then let’s get your started on your home search!