Student Debt Challenges Homeownership

Confidence in capturing key part of the American dream hinges on student debt.

Buying your first home has always been a key part of the American Dream, and a new survey from NeighborWorks finds the majority of Americans (87% of survey respondents) still believe buying a first home is an essential step in achieving that dream.

Unfortunately, it also seems like student loan debt is increasingly becoming the roadblock that makes or breaks a family’s ability to achieve that dream.

  • 28% of those polled know someone who is delaying the purchase of a home because of student loan debt – compared with 24% last year.
  • 57% say student loan debt is at least a partial barrier to their own home buying goals – compared to 49% in 2014.
  • 76% of student debtors find the process to buy a home complicated. That’s higher than the general 70% of adults who believe the process is complicated.

The average borrower currently leaves school with $28,400 in student debt. However, the graduating class of 2015 will bump that number even further as they leave school with an average debt of $35,000. If this trend continues, more and more young adults may be delayed or prevented from buying their first home due to high levels of student debt.

“Student debt is becoming an increasingly pervasive barrier to first-time homebuyers,” agrees Maria Gaitan, Housing and Business Development Manager for Consolidated Credit. “But careful budgeting and planning can help a buyer overcome these challenges to achieve the American Dream, and that’s where HUD-certified housing counseling services prove invaluable because counselors are trained to help clients overcome whatever barriers they may face.”

Why student debt is such a tough barrier

If you haven’t yet gone through the home buying process personally, you may wonder why high student debt levels are such a sticking point. It comes down to the debt-to-income ratio assessment that occurs during the mortgage application process.

When you apply for a mortgage or mortgage prequalification, the lender will review your finances and specifically evaluate your debt-to-income (DTI) ratio. This is the amount of debt you have relative your income level. You can determine your ratio by adding up all of your monthly debt payments and dividing by your total monthly income.

In order to qualify for a mortgage, your DTI must be less than 41% with the monthly mortgage payments of the home you want to buy included. If your ratio is higher, you can’t afford that much home.

High student debt drives up a buyer’s DTI ratio to make larger mortgages unaffordable. At a certain level, the buyer simply cannot qualify for a mortgage at all. In order to buy a home, some of the buyer’s debt must be eliminated first.  When you’re talking about student loan debts that usually have a 10-year term on repayment – or 25 years if federal student debt has been consolidated – it pushes the ability of a borrower to buy a home further and further back.

Housing counseling helps first-time buyers achieve success

“There are programs and resources available that can help first-time homebuyers overcome challenges with student debt and other common roadblocks such as lack of a sufficient down payment,” Gaitan explains. “Most buyers aren’t aware of all their options, even if they’ve been through the process before. First-time buyers often need help to understand how to jump the hurdles between them and their goal of ownership.”

NeighborWorks offers the helpful Know Your Numbers Infographic shown below that explains the four basic metrics you need to address if you want to be a successful homebuyer. HUD-certified housing counselors can help you understand these four points to ensure you can secure your slice of the American dream.

If you have questions or you’d like to set up a free, confidential consultation with a HUD-certified housing counselor call Consolidated Credit’s Housing Department today at 1-800-435-2261. You may also benefit from enrolling in a HUD-approved homebuyer course.

Homeownership by the numbers infographic

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