05 Feb Student Loans Standing in the Way of Home Buying for College Grads? Here, Some Solutions
By Malcolm Hollensteiner
It’s no surprise that young homebuyers have often struggled to come up with the funds to buy their dream home. Many start with a smaller home, townhome, or condo in order to take out a mortgage on their own.
Today, however, even those making salaries that may allow them to purchase a relatively high-priced single family home are unable to because of significant college loan and grad school debt. Debt to income ratio is becoming a common roadblock to homeownership for potential buyers across the country.
The number of first-time homebuyers, more than half of whom are aged 25 to 34, has been shrinking since the recession struck, and young buyers now make up their smallest share of the housing market in more than a decade, according to a recent CNBC report. Additionally, a report from the New York Federal Reserve suggests that graduates’ nearly $1 trillion in debt is beginning to hinder the economy overall, and is forcing the largest crop of potential homebuyers out of the market.
What Can a Buyer Do?
To establish and maintain good credit, graduates must make repaying school loans a priority. However, with a tough job market and low starting salaries, recent grads who make their loan payments often don’t have much left over to save for a down payment – thus increasing the amount they need to finance. If a graduate is devoting a significant percentage of their paycheck to repaying college debt, it reduces what they’re able to save for a down payment. Here are some strategies your agents should be suggesting to young homebuyers:
- • Pay down the debt as much as possible. Lenders do not count debt against a potential borrower when they have less than 10 payments left on the loan. For today’s college grads, who average $25k debt or more, this can take years.
• Involve a family member in the mortgage process. Buyers with a family member who can offer a financial gift towards a home’s down payment can reduce the total amount the buyer needs to borrow.
• Get a cosigner. Standard FHA loans allow a non-occupant co-signer, so buyers with a parent or relative willing to cosign the loan can help to increase their debt-to-income ratio and better their chances of obtaining a mortgage.
• Buy with a friend. Today’s graduates may not have the finances to obtain a mortgage on their own, but pairing up with a friend could increase a buyer’s chances of obtaining a mortgage – assuming both do not have considerable college debt. While this is a solution for grads looking to buy a home and get out on their own, anyone that enters into a home purchase with another needs to be cautious and thoroughly think through the decision. Future plans, such as marriage and job relocations, could make a partnership such as this inconvenient later down the road.
For a potential buyer to get a fair assessment of their financing options, it’s most important to have an in-depth discussion with a lender up front. TD Bank recently released results of their first Mortgage Service Index, which evaluated homebuyers’ experiences during the mortgage process, and found that buyers who had open communication and regular, in-person discussions with their lender during the mortgage process had a much more positive home-buying experience overall. In fact, of those who rated their home-buying experience highly, 28 percent were more likely to give their lender high marks on explaining their mortgage and the options available, which will be invaluable to buyers who are concerned about their credit options.
Malcolm Hollensteiner is the director of Lending Sales and Products for TD Bank.
Reprinted with permission from RISMedia. ©2015. All rights reserved.