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Your student loan debt affects whether you can buy a house, in both direct and indirect ways. Here’s how:
Student loan payments make saving for a down payment more difficult and mortgage payments harder to handle once you’re a homeowner.
Student loan debt may increase your debt-to-income ratio, affecting your ability to qualify for a mortgage or the rate you are able to get.
Missing a student loan payment can lower your credit score, but consistently paying on time can bolster it.
Having student loans, though, doesn’t mean you’ll never be able to get a mortgage. Here’s what you should know as you explore your options.
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how do student loans affect buying a house
Student loan payments hinder savings
Sending hundreds of dollars a month to your lender or servicer may feel like the most immediate, and most frustrating, way student loans affect your ability to buy a house.
But saving up 20% of the home’s value for a down payment, traditionally the ideal amount, isn’t always necessary. Look into first-time home buyer programs in your state, which can provide money for the down payment, or low-down-payment mortgage options.
Federal agencies like the Federal Housing Administration and the U.S. Department of Veterans Affairs also offer mortgages that require smaller down payments — or none at all, in the case of VA loans.
When deciding whether to approve you for a mortgage, lenders look at how much debt you already have compared with your pretax income. That’s called your debt-to-income ratio, known as DTI, and it’s calculated based on monthly debt payments.
There are different types of debt-to-income ratios, and not all mortgage lenders calculate them the same way. But in general, car loans, student loans, minimum credit card payments and child support all factor in. The more debt you have — or the lower your income — the higher your DTI will be.
A DTI of 36% or less is ideal, but government-backed mortgages, like FHA loans, may approve you with a DTI of up to 50%.
Consider focusing on paying off student loans, or credit cards if they have higher interest rates, and don’t add to your debt before buying a home. You could aim to get rid of one student loan payment before you apply for a mortgage; paying off the loan with the highest interest rate will save you the most money over time.
Refinancing student loans to a lower monthly payment may also reduce your debt-to-income ratio. But it adds a line of credit to your credit report and may extend your repayment timeline. Make sure you refinance six months to a year before you apply for a mortgage. That lets positive payment history offset the credit score dip that may occur from shopping for a refinance loan.
A higher credit score means a better chance of getting approved for a mortgage and receiving a favorable interest rate. Payment history makes up 35% of your FICO score, one of the two main credit scoring models, and mortgage lenders want to see a history of on-time debt payments.
Consistently paying student loans on time will strengthen your score. On the flip side, a missed payment or letting your loans default will hurt it.
Credit mix is a smaller component of your score. But using a variety of credit types — such as student loans, car loans and credit cards — can help your score as long as you’re making payments on time.
how do student loans affect getting a mortgage
Qualifying for a Mortgage With Student Loan Debt
Student loans — in moderation — can help you achieve your educational and career goals, but high student loan debt can also impact your future plans, like qualifying for a mortgage to buy a house.
Many factors determine your eligibility for a mortgage, and although student loans can significantly affect the home-buying process, they don’t need to keep you from your dreams of being a homeowner. Here’s what you need to know:
A 2018 Student Loan Hero survey found 43% of U.S. graduates were waiting to purchase their first home due to student debt. But if you believe you can afford to make payments on a home (while paying your other debts), you just need to find a lender who agrees with you.
Lenders look at your debt-to-income ratio (DTI) before offering a mortgage because it’s how they determine whether or not you can afford a mortgage loan.
There are two parts to a DTI — the front-end and the back-end.
Front-end and back-end DTI
A front-end ratio is also known as the housing ratio. This ratio is found by dividing your projected monthly mortgage payments by your gross monthly income (your income before taxes).
Your projected mortgage payment will include the costs of the principal, taxes, insurance and interest payments, collectively known as PITI.
Your lender will set the terms of the limit for conventional loans. Depending on the lender, expect a limit of approximately 28% for the front-end ratio. Federal Housing Administration (FHA) loans, however, do allow for a maximum front-end ratio of 31%, as of 2019.
The back-end ratio accounts for all of your debt obligations in comparison to your income. The lender will find this ratio by adding your monthly debt payments to your housing expenses, then dividing that number by your gross monthly income.
As well as the PITI on your mortgage, these debt payments will include child support, credit card minimum payments and — yes — student loans.
Here’s the rub: typically, many conventional lenders prefer to see a back-end ratio under 36%. If you take out an FHA loan, the highest back-end ratio you can hold is 43%, as of 2019. Some potential borrowers may qualify for an FHA loan, but perhaps not a conventional loan. Check out Student Loan Hero’s DTI calculator, but if the numbers aren’t what you’d like to see, don’t panic.
How student loans affect the mortgage process
Student loans by themselves cannot prevent you from getting a mortgage. As previously mentioned, the effect of the student loans on your debt-to-income ratio is the key deciding factor. When you go to a lender seeking a home loan, they are going to look at your front and back-end debt-to-income ratios, your credit history, your assets, income and work history and how large of a down payment you have available.
If you have high monthly student loan payments, but no other debt, and a decent income, and you’re looking for a reasonably-priced home, you’ll likely be fine when you apply for a home loan. (If you’re not sure, however, crunch the numbers yourself.) If, however, those debts push you past the lender’s debt-to-income threshold, then yes, your student loans may prevent you from qualifying for a home loan.
how do student loans affect mortgage
Other factors in getting a mortgage
Besides your front-end and back-end ratios, lenders also consider other factors when considering you for a home loan. Here are three other important items:
1. Debt and your credit score
Some lenders will allow you to hold a back-end ratio that’s as high as 50%, if you have great credit — this is uncommon, but not impossible. If you have other loans with small balances wiping out this loan in its entirety could help bring your DTI score to a better place. Credit scores matter too: if you are planning to apply for a FHA mortgage, your FICO score must be at least 500; for a conventional mortgage, at least 620 for most lenders.
2. Size of downpayment
The size of your available down payment will affect your front-end ratio — the more you borrow, the higher the PITI. If you can save a 20% or more down payment, your student loans are far less likely to affect your loan process.
3. Your income and job history
Income is a key factor in determining your acceptance for a loan. The concept of debt-to-income ratio (both front-end and back-end) pits two variables against each other: your debts and your earnings.
This may be one of the reasons why a Zillow report shows that student loans have a negligible impact on getting a mortgage as long as you have a bachelor’s degree or higher. Sure, you have loans — but you might also have a higher income. It’s tempting to focus on debts, but if you can boost your earnings (perhaps by negotiating for a raise), you’ll also improve your debt-to-income ratio.
Did you spend several years of your adult life completing graduate school? The loans themselves may not affect your ability to secure a mortgage, but your employment history might. Unfortunately, as part of the credit history portion of certifying you for a loan, some lenders may not accept your income numbers unless you have at least two years of employment history. Other lenders may be satisfied if you at least stay for two years within the same industry. So if you’re fresh out of school, you might not be able to secure a mortgage until you’ve held a steady job for a year or two.
Make a plan, accelerate debt payments and be prepared to wait
If education debt is making your debt-to-income ratio too high, consider looking for ways to pay off your student loans faster. There’s no penalty for prepaying student loans, so you can make extra payments anytime.
To achieve this, you’ll either need to find room in your budget through saving or making extra income. Small lifestyle changes could help you free up more of your monthly income. Alternatively, you could find a part-time job or start a side hustle for some extra cash. Driving for Uber, walking dogs in your neighborhood or finding freelance work online are all options for boosting your income.
Although lending rules can sometimes feel burdensome, they are there to protect you from taking on debt you can’t afford to pay back. Spending a few more years getting your student loans or other debts paid down could allow you to qualify for a lower interest rate or higher mortgage amount in the future.
Plus, once you have a better credit score and longer employment history, you will even have more options when you’re finally ready to take the leap into homeownership.
Refinancing student loans en route to home ownership
Restructuring your debt through student loan refinancing may be one way to afford a mortgage loan. Creditworthy borrowers — or those who apply with a creditworthy borrower — can qualify for low interest rates, thereby saving money on their loans. You can also choose a shorter repayment term to get out of debt fast. Just make sure you research all the pros and cons of refinancing before making changes to your loans.
As long as you understand the process, refinancing with a private lender could be another strategy for getting out of debt ahead of schedule and seeing your debt-to-income ratio decrease as a result.
So, does a student loan affect your ability to get a mortgage? Yes, it can — but there are ways to whittle down your student debt and still qualify for one.
Refinancing student loans, improving your credit score, renting for a few extra years and lowering your DTI ratio are all ways to improve your chances of qualifying for a mortgage and buying your first home.
how do student loans affect the economy
3 ways student debt impacts the economy
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While student loans can be crucial in helping Americans access these benefits, economists say that student debt is holding the economy back.
Approximately 45 million Americans collectively owe $1.7 trillion in student debt. And even though federal student loan payments have been paused since March 27, 2020, the student loan crisis is still looming. The moratorium is set to expire Oct. 1, 2021 and politicians and experts warn that millions of borrowers may be thrown into “extraordinary financial hardship” when payments resume.
CNBC Make It spoke with Nela Richardson, chief economist of human resource management firm ADP, about three of the biggest ways student debt impacts the economy.
Plus, recent college graduates have entered the workforce during one of the most hostile labor markets in history for young workers. According to an analysis of BLS data by Pew Research Center, 2020 college graduates saw a bigger decrease in labor force participation than those who graduated during the Great Recession.
“Student debt falls heavily on the shoulders of young people. They have the lowest incomes and are most likely to have recently finished college,” says Richardson. “We know from our data that young people were disproportionately impacted by the pandemic. They were more likely to report a job loss, a reduction in job responsibilities or a pay cut. When you add that to student debt, that creates quite a sizable hurdle.”
The result is growing generational inequality that will have significant long-term consequences, she warns: “It’s about macro growth. We should care [about student debt] because it does affect the future of GDP growth when there’s a lack of investment among young people.”
Federal Reserve data indicates that millennials control just 5% of U.S. wealth while baby boomers control over 52%. In 1989, when baby boomers were around the same age as millennials are today, they controlled 21% of the country’s wealth.
Student debt impacts borrowers over time by raising debt burdens, lowering credit scores and ultimately, limiting the purchasing power of those with student debt. Because young people are disproportionately burdened by student debt, they will be less able to participate in — and help grow — the economy in the long run.
“What you want is widespread opportunity for investment over time. That’s what’s good for the economy. That’s what’s good for Wall Street,” says Richardson. “If you don’t have that, then you’re looking at slower growth from the prime-aged working population — and that’s problematic.”10:01How student loans became a $1.6 trillion problem
The Federal Reserve estimates that student debt shaves roughly 0.05% off GDP per year. While the current impact may appear relatively small, as borrowers struggle to buy homes, save for retirement and invest in the stock market, the impact may become more significant.
“All those assets that the boomers have been accumulating to feed the economy, who’s going to buy those assets? Who’s going to take over to make sure that the stock and asset markets keep going up?” asks Richardson. “Maybe boomers can leave those through inheritance to their children, but that just concentrates wealth, which gets back to the issue of inequality.”
Currently, about $158.5 billion worth of federally managed student loans are considered in default — and this total may increase once the pause on federal student loan payments expires. Brookings estimates that by 2023, nearly 40% of borrowers are expected to default on their student loans.
“If you have delinquencies, that lowers credit scores, and that’s problematic in terms of doing anything in the economy from getting a credit card to getting a mortgage,” says Richardson, citing ADP data that suggests student loans account for 35% of severely derogatory loan balances, more than three times the delinquency rate of mortgages.
Richardson fears that because of student loan difficulties, borrowers will be held back from generating wealth through means such as buying a home or starting a business. “When you think about how the middle class builds wealth over time, there’s two ways in the U.S.: homeownership and entrepreneurship,” she says.
“If you’re very focused on the here and now and the present economic recovery, you can shrug off consumer debt,” she says. “But if you care about the future, and you think about what leads to feature growth and investment, then student debt is one thing that can block that.”