If you think about your parents and grandparents and the American Dream you probably recall something along these lines: get a good education, a decent job, get married, buy a home, and start a family.
Over the past few decades that dream has undergone a lot of redefining. Some of the basic concepts, like what constitutes a good education or a good job, have changed. Even the concept of what is a marriage and a family have seen some radical changes, at least in the eyes of the law.
Is it any wonder that the concept of home ownership and how to acquire a home has changed as well? According to a 2017 survey from the National Association of Realtors (NAR), 80 percent of millennials don’t own a home. One of the biggest reasons, according to the report, is the cost of the “good education”. 83% of the millennials that don’t own a home say that student loan debt is holding them back from purchasing a home.
Debt to income ratio, the percentage of your monthly income spent on debts like mortgages, credit cards, student loans or auto loans, is considered when applying for a mortgage, and that puts people with high student loads in a difficult spot. If your debt load is high in relation to your income, that can make you less appealing to a lender and, in turn, less likely to get approved for a mortgage loan.
The Good News
Having a large amount of student debt does not in of itself disqualify you from getting a mortgage. You just need to explore your options.
Paying off some of your debt is a good place to start. Bringing those credit card balances down and maybe choosing a less expensive car or refinancing an auto loan can improve your financial profile.
Talk to your student loan lender. If you have federal student loans, you may want to explore an income-driven repayment plan. With this option, your monthly payments can be reduced to a percentage of your discretionary income. This can be a huge help for those whose income is swallowed by high loan payments.
In April of 2017, Fannie Mae introduced three new policies aimed at helping people with student debt achieve home ownership. The policies are:
- Student Loan Cash-Out Refinance: Offers homeowners the flexibility to pay off high-interest student debt while potentially refinancing to a lower mortgage rate.
- Debt Paid by Others: Excludes from the borrower’s debt-to-income ratio non-mortgage debt, such as credit cards, auto loans and student loans, paid by someone else.
- Student Debt Payment Calculation: Allows lenders to accept student loan payment information on credit reports, making it more likely for borrowers with student loan debt to qualify for a mortgage.
Private lenders may also be able to offer refinancing options for you student loans. These might be at a lower interest rate than you are presently paying.
Some private lenders will also consider non-traditional payment sources when calculating your overall profile. Depending on a person’s circumstances, some lenders will allow for higher debt-to-income ratios than average.
Compromise is almost always one of the keys to home ownership. Adding a little extra time to your commute; buying a smaller home; buying a home your second of third choice of neighborhoods instead of you firs; putting of leasing a new car. Realtors often advise clients to go by the 80-20% rule. “If you are getting 80% of what you want, maybe you should take it.”
In other words, if your primary goal is to purchase a home, how much does it matter if it has a two- or a three-car garage, or if is in Town A, or just over the line in Town B? Keep this attitude in mind when you are looking for financing.
Where to Start
- Find a Realtor you know, like and trust. Talk to them about your wants and desires. They know the market and the alternatives that you will have.
- Ask them for suggestions on where to apply for a mortgage. They usually know who can bring a deal to the closing table and which mortgage originators might not.
- Be open and honest with the Realtor, once you are their client they are forbidden from disclosing confidential information you share without your permission or court order.
- Talk to a mortgage originator. If your credit is less than perfect or if your debt to income ratio is high, they can advise you on a course of action.
In my own experience I have found that the answer to whether of not you can afford that home you want varies. I can tell you this: the answer is seldom ‘no’. It can be ‘not yet’ or ‘if you can do this’, or maybe even ‘yes.’