You've heard it all before. You can't afford to buy a home without a college education. You wont't make as much money if you don't go to college. You'll never realize your full potential if you don't get a college degree. Now you've earned a college degree, but where's your piece of the pie? If you have student loan debt, it may seem more like a pie in your face. The payments on your student loans feel like a ship's anchor dragging down your hopes of buying a home.
So what happened?
Student Loan Debt Shipwrecks Plans to Buy a Home
Rapidly rising college costs, new mortgage credit approval rules and stagnant wages create a financial "Bermuda Triangle" that can cause your chances of getting approved for a mortgage to disappear. College students are taking on more debt to meet rising education costs, college grads are competing for professional positions with lower wages, and new mortgage rules are making it difficult for grads to qualify for home loans.
According to the Institute for College Access and Success, 71 percent of U.S. college seniors who graduated in 2012 had student loan debt. In 2012, the national average debt burden carried by graduating college seniors was $29,400. Worse, this represents a 25 percent increase over average student debt of $23,450 in 2008.
- Students are borrowing more: The Federal Reserve Bank of New York reports that average student loan debt increased from $18,957 in the fourth quarter of 2007 to $24,803 in the fourth quarter of 2012. This represents an increase of approximately 31 percent in five years. The New York Fed also reports that student loan debt is the only type of consumer debt that has increased since 2008. Student loan debt typically accounts for the highest balances and payments other than mortgage payments. This means that student loan balances and payments can render you ineligible for a home loan.
- Qualified mortgage rule raises bar for mortgage applicants: New mortgage rules became effective in January 2014; these rules were designed to ensure that mortgage borrowers and home buyers can afford their mortgage loans and homes. According to qualified mortgage rules that became effective in January 2014, the maximum debt-to-income ratio allowed is 43 percent of your monthly gross income. This means that the total of your prospective mortgage payment including taxes and insurance and minimum payments for consumer debt including student loan payments cannot exceed 43 percent of your gross monthly income. 43 percent of your gross income amounts to a higher percentage of take-home pay, which is what you'll use for paying your mortgage, student loans and other debt.
- Wages are not keeping up with expanding economy: The Economic Policy Institute reports that when adjusted for inflation, U.S. wages rose approximately 0.50 percent between 2009 and 2014 as housing and other economic sectors posted significant growth. Rising home prices and stagnant wages present a double risk if you're carrying student loan debt.
3 Ways to Deal with Student Loan Debt
While student loan debt can present problems when buying a home, these tips can help improve your chances of mortgage approval.
- Consolidate your student loans: Consider rolling all of your student loans into one loan with one payment. The U.S. Department of Education offers direct consolidation loans for those with federal education loans and student loans issued by federally approved lending programs through private financial institutions. Compare several quotes for consolidating your education loans; the lower the cost and interest rate for a consolidation loan, the lower your monthly payments. Rolling several student loans into a consolidation loan with one payment can help reduce the chances of overlooked payments that can lower your credit scores.
- Explore repayment options for your student loans or consolidation loan: Federal student loans may qualify for extended repayment plans, income based repayment and other options that can potentially lower your student loan payments or consolidation loan payment.
- Ask for financial help: Ask your family to help reduce your student loan debt or provide a cash gift to help you increase your down payment for a home. You'll need to provide the mortgage lender with a letter from the giver indicating that the money need not be repaid.
Request several mortgage quotes and discuss your financial situation with mortgage loan officers. They can help you find affordable mortgage options.