High levels of student loan debt may be hampering and in some cases preventing many prospective first time home buyers from securing a mortgage.
A changing workforce and rising college tuition are just two of the factors leading students to take on more debt. Even as unemployment across the United States continues to shrink, there is still a considerably high unemployment level for adults between the ages of 18 to 30.
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The Importance of First Time Buyers
First time home buyers have long been the cornerstone of the housing market. As demand for housing has waned in recent months among rising interest rates and home prices, many housing experts were hoping that first time home buyers would partly fill in the void. But that hasn’t happened, and some believe that student loans may be to blame.
Lawrence Yun, chief economist at the National Association of Realtors, says that for the past six months only about 30 percent of new home sales are coming from first time home buyers. “And this is historic lows,” he says. “Typically it should be about 40 percent to 45 percent. And I believe the key reasoning is that many of the younger households, they are saddled with student debt.”
To give some perspective, student debt has tripled from where it stood a decade ago and now stands at more than $1 trillion. That’s roughly 7% of the United States GDP for 2012. And to make matters worse wages for college graduates have actually dropped. In the meantime everything from food, gas and housing has also gone up.
The problem is student loan debt can contribute heavily to a potential buyer’s debt-to-income ratio (DTI). Depending on how much money you make even paying back 300 or 500 a month on loans push some above the threshold that many lenders will allow. Of course, this doesn’t take into account other forms of debt including car payments, child support and credit card bills.
What Can Be Done?
Rising student loan debt is so interconnected with multiple pieces of the economy, it can be hard to know where to begin. For starters, there needs to be serious effort put into the lingering problem of high unemployment among young adults – far too many of whom have joined the ranks of the working poor. But there is another important step that could be taken on behalf of the FHA which could help allow more people to buy their first home.
The FHA currently allows the lenders that it does business with to ignore student loan debt that has been deferred for more than 1 year when determining a borrowers eligibility to pay back a mortgage. So, even if you owe 40,000 in student loans, and that debt has been deferred, it won’t hurt your chances of getting a loan. However, the FHA is looking to get rid of that waiver this year. Should the FHA keep this waiver in place at least until unemployment fell a bit more, it would help more people to be able to take out a loan for their first house. If the FHA does decide to scrap the waiver, then that means there is still a narrow window for recent graduates to get their first home.
