Student Loan Debt & Home Ownership

First, the statistics:

• 68% of seniors who graduated from public and non-profit colleges in 2015 had student loan debt.  The average debt load was $30,100 per student.
   
• The average student loan payment for borrowers aged 20 to 30 years is $351/month.
   
• 44% of individuals with student loan debt said they "cut back on day-to-day living expenses" and 37% said they "delayed saving for retirement or other financial goals" because of their debt.
   
• 71% of renters believe their student loan debt has delayed their ability to purchase a home.

Student loan debt can have dire consequences for people trying to qualify for a mortgage loan.  Student loans affect a borrower's debt-to-income ratio.  In analyzing debt-to-income, mortgage lenders consider debts like proposed housing payment, student loan payments, car payments, alimony or child support, and monthly minimums on credit cards and personal loans.

Just a few years ago, mortgage lenders were able to omit the payments of a student loan that was deferred for a year or more after closing.  That is no longer the case.  With few exceptions, student loan payments must be considered whether the loans are deferred, in forbearance, or in repayment.  In some cases, lenders are not even permitted to use a payment that is based on an income based repayment plan.  We must use a payment that, fully amortized, will pay off the loan over its term.

Should student loans be avoided like the plague?  The argument can be made that student loans are helpful because they help graduates increase their earning power.  Students with debt are expected to be able to pay off those loans after graduating and joining the job market.  Furthermore, the lifetime earnings of college graduates exceed those of high school graduates by nearly a million dollars!  So, like a mortgage or business loan, many consider student loan debt as "good" debt.

And, in most cases, student loan payments are manageable for borrowers.  Most folks can afford the average payment of $351/month.

Certainly, I have run into customers who work in medical, legal, and technical fields who have considerable student loan debt.  Like $100,000 or more!  But these "high earners" are managing the payments on that debt just fine, and have plenty room to add a mortgage payment to their debt ratio.

The problem, at least with respect to qualifying for a mortgage loan, is when student loan debt doesn't lead to increased earnings.  While I don't keep statistics, I meet a handful of potential borrowers every year who aren't able to qualify for a mortgage because of student loan debt.

One such customer had nearly $85,000 in student loan debt.  The payment on this debt was $550/month for 30 years!  This customer made less than $15/hour.  If he had no debt whatsoever, he could afforda  modest mortgage payment (around $1,200/month).  But with $550/month in student loan payments, he could only afford a mortgage payment of $600/month.  And in our market (without a considerable down payment), that's not enough to support a home purchase.

So what's the best way to get a mortgage with student loan debt?

• Pay down student loans as quickly as possible!  Buckle down.  Get a roommate, make your coffee at home, shop at Goodwill, and put every dime you can into getting rid of your student loan debt.
   
• Avoid additional consumer debt like auto loans and credit cards.  Consider a used car for which you can pay cash instead of a $30,000 auto loan with a $350/month payment.  Every dollar you spend on that car payment is a dollar you can't spend on a mortgage payment.
   
• Ask a relative to gift you a down payment to help you qualify.
   
• Before taking on student loans, consider your return on investment.  The average cost of a four year degree in art history is $190,688.  And the mean wage of an archivist, curator, or museum technician is $52,460/year.

  On the other hand, the cost of a welding certificate at Peninsula College is less than $6,000.  And the mean annual wage for a welder is $43,410.

Choose wisely, friends!