September 13, 2019

Student debt and mortgage loans

You hear it nearly every day. Rising college costs have conspired with the relative financial instability of youth to make buying a home nearly impossible for people younger than 35.

There’s no doubt. A college degree is definitely worth having. It provides more secure employment, higher lifetime earnings and even a longer life expectancy.

But 80 percent of Millennnials with student loans say their debt is holding them back from purchasing a home. Less than a third own homes, well below the historical average of about 40 percent.

Because home-buying requires people to take on even more debt, many young people hesitate at this huge life decision. Sometimes it just seems like too much. But research shows most young people and renters in general have a poor grasp of what is needed to obtain a mortgage.

Most assume a 20 percent down payment is required, think their credit score is too low or just plain don't understand the monthly payments.

So, let's look at a few elements needed to obtain a home mortgage loan:

Whether carrying debt for a student loan, a car, or credit cards, lenders expect that borrowers are managing a varied mix of expenses. Lenders look at two ratios to make loan evaluations.

First off, on the “front end,” lenders don’t want borrowers paying more than 28% of total gross (pre-tax) income for housing expenses—including mortgage payment (consisting of principal plus interest), property taxes, and insurance.

Second is the “back end.” Lenders don’t want a housing payment combined with other debts to exceed a certain proportion of gross income. Depending on the lending environment, loan type, credit and down payment, the back end is typically 36% but can stretch as high as 50% with other factors considered.

Ultimately, finding ways to bring debt levels down to satisfy the ratios may be the fastest ways to get to into home ownership.

A lot still depends on where you're looking to buy and your saving rates. For example, the research found that those in Miami may be able to afford a standard 20 percent down payment on a home in a little over six years. Residents of San Jose, Calif., meanwhile, will likely need to save for over 20 years.

Here’s some good news: Many down payment assistance (DPA) programs allow home buyers to pay less up front! FHA loans have down payment programs offering as low as 3 percent, with USDA and VA loans offering Zero-down options.

Many more assistance programs grants are administered at the state or local level. To see what’s available, direct your clients to search for “down payment assistance” or “first-time homebuyer grants” in your state. Bay Equity's loan officers are educated on dozens of programs available in your area!

According to a study by the National Association of Realtors, more than 70 percent of non-cash, first-time home buyers - and 54 percent of all buyers - made down payments of less than 20 percent over the last five years.

Some young people have other misconceptions about home buying keeping them out of the market. Seventeen percent of millennials believe they won’t be approved because of their credit score.

The average credit score for millennial homebuyers in the nation's 50 largest metro areas is 656, according to a 2018 analysis. And applicants with credit scores as low as 580 may be eligible for some mortgage loan programs.

The launch of the UltraFICO score later this year promises to be a game-changer - 70 percent of those with at least $400 in the bank and no negative balances in the past three months should see their score improve!