9/21/2012 4:09 PM ET|
Student loans haunt home shoppers
For those looking to buy a first house, student debt can be a major obstacle -- one with repercussions for the housing market.
Student loan debt, which topped $1 trillion in 2012, affects graduates in a variety of ways, not the least of which is their ability to buy a home. Real estate experts fear that rising levels of student debt, particularly in a time of tight credit, could put a serious crimp in the first-time homebuyer market. Student loan debt not only affects a borrower's ability to save for a down payment; it also limits the person's ability to afford a reasonable monthly payment.
"Student loan debt disproportionately impacts young households, which are typically the heart of the first-time homebuyer market," says Nicolas Retsinas, a senior lecturer in real estate at Harvard Business School. "Because first-time buyers are so crucial to a healthy real estate market, this issue is also disproportionately impacting the housing recovery. Student loan debt is just one more headwind that undermines the recovery."
A Federal Reserve Bank of New York study released in May showed that student loan debt is the only form of consumer debt to substantially increase since 2008. The study reported that 40% of consumers under age 30 have student loan debt, with the average 2011 graduate owing $23,300. Young people have turned to student loans in greater numbers because unemployment, rising tuition costs and declining home values have reduced the ability of many parents to pay for college from their savings and home equity.
Student loan debt and home-buying
According to the National Association of Realtors 2011 Profile of Homebuyers and Sellers (.pdf file), the number of first-time homebuyers -- about 52% were ages 25 to 34 -- dropped from 50% of the overall housing market to 37% last year. In addition, homebuyers in this age group (whether first-time or move-up buyers) dropped to 27% of the total market from 33% in 2001, the lowest market share in a decade.
"Lenders used to make exceptions for things like a high debt-to-income ratio, but now, in response to widespread mortgage defaults, they are more carefully scrutinizing the ability of borrowers to repay their loans," says Retsinas. "In some ways we've overcompensated and are denying loans to people who have OK credit, but clearly we are living in a more risk-averse time."
Yvette Clermont, a personal mortgage consultant and branch manager with Inlanta Mortgage in De Pere, Wis., says it makes sense to ensure that people can truly afford a mortgage payment in addition to their student loan payments. But she adds that automated underwriting systems sometimes unnecessarily disqualify potential borrowers.
"Repaying student loans can be complicated because many people have multiple small loans or have deferred their loan repayment," says Clermont. "If you have several late payments on these loans, which can easily happen if you thought the loan was deferred and it wasn't, your credit score can be damaged and your loan denied even though you have corrected the mistake."
Clermont also notes that borrowers receiving help from their parents to repay their loans cannot count that assistance as income.
Student loans and mortgage qualifications
Dominic Turano, a sales manager at First Home Mortgage in Washington, D.C., says that sometimes student loan debt can improve a consumer's credit scores if the payments are all made on time, since most young people lack a lengthy credit history.
"In order to qualify a borrower, though, we have to take into account the total debt picture," says Turano. "Someone with a boatload of student loan debt may have a hard time qualifying."
He recommends pulling your credit report to make sure the student loan information is accurate and consolidating your loans to reduce the monthly payments and simplify the loan repayment process.
Even with student loan debt, many prospective borrowers can qualify, as long as they have sufficient income.
- Calculator: Can you pay off your student loan?
Maggie Flanagan, a first-time homebuyer with student debt, worked with Turano to finance her home purchase.
"I didn't know if I should be paying off my student loans first or saving money for a down payment," says Flanagan. "I was surprised that I qualified at all, because I assumed my student loan debt would be a problem. But I have good credit, and I don't have any credit card debt or a car payment. Interest rates are so low that I was able to qualify for more than I thought."
While Flanagan was able to save some money for a down payment, she had to rely on her mother to help pay for closing costs.
"The first-time-buyer sector of the housing market is the red meat of real estate," says Retsinas. "First-time home purchases drive the move-up market. We're seeing a renewed interest in homeownership as the market recovers, but the high level of student loan debt undermines that market."
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I think at the root of this problem you will find that while tuitions have indeed kept up with inflation, wages have most definitely not.
Like another poster put here, high schools should prepare future college students, as well as students going straight into the workforce to take basic finance classes. I wish I would have attended a few when i was younger I don't remember any being offered)...to understand credit, percentages, compound interest, etc... I would be far ahead of the curve, especially in long term finances, like my 401 k. I have been doing my own learning as of late, and I am in my early 50's. By studying stocks, percentages, odds of risk, capital appreciation, compounding interest, etc..I have my 401 k plan on a nice roll.
It is so true with kids today. I will not say all kids, as there are lots of determined hardworking kids out there, but, for the majority, it's the me, me, me mentality of a spoiled generation. I also worked my butt off since i was 12 years old. I did anything to make a buck in the old days. I will always remember my father telling me something, if you want something, then go work for it. I had my eyes set on a 12 speed Columbia bike, and it took me 3 years of mowing lawns, baby sitting, selling seeds door to door, to save for it. I was so proud to pay $99.99 for it out of my own pocket. Kids today, need to take that kind of attitude into life, instead of relying on mommy and daddy to fork over and pay for their high society lifestyles.
I am a flight attendant ( something i never aspired to do), and just flew with a new hire of 23 years old straight out of the University of Texas, with a lame degree in english and spanish. You don't need a 50k+ education for a degree in languages. She is making about 2k a month in total salary, and lives in midtown Houston paying $1,225 a month for rent, not including bills. I don't know if she has student debt, but, I can be assured the parents coughed up for her education. I am also sure they are subsidizing her living the high life at her young age as well. I am 52 years old, topped out in pay, can make over 100k if I want to fly my tail off, and living in a $1,000 a month townhouse. My total needs for a month, is $2,200 a month. I invest for my future and do my own due diligence in the stock market. No financial advisor will look after your money any better, than you would yourself. Anyway, kids today, need to look toward their future, plan far ahead, and work, work, work to get ahead.
Before they invest in real estate, they should have most of their student debt paid off, and at least 8 months of basic living expenses covered in a liquid savings account. Then a substantial down payment, and great credit. I owned once, built a brand new house, borrowed for the down payment, put in a pool, and lived the good life for awhile. I did not have the necessary 8 months living expenses saved, although worked a lot of hours, I slowly fell behind. I eventually sold for a profit, and decided to just rent. Did away with the headaches and high taxes, and have much more flexibility now. My way is not the only way, but, if a kid today really wants that for their future, they should make sure they have all their eggs in their basket filled. By the way, I waited till I was 39 before I ever bought a house. By looking how the world economy is on the brink of collapse, I would suggest the young generation to stay away from buying anything now. Pay down your debt, stash cash for a better future. When the timing is right for you, then maybe make the plunge.
I dont understand - loans to pay for college that lead to higher paying jobs; where is the problem? These recent grads shouldnt be buying new homes right away anyway - work and save first. also, $23k in student loan debt doesnt seem like that much to me...if it leads to you making more money than you would have without it. new cars these days cost close to this number....
I have no sympathy for the deadbeat entitlement crowd. my wife and I both worked hard getting our education I spent 8 years in the Marines and two tours of duty in Vietnam. She worked at a Sears catalog mail center and at Red Lobster,we both graduated with no debt, We were the first in either of our families with a college degree. 20 years later our two sons worked their way through school and both graduated without debt. I have a grandson starting at Clemson this year who'll hopefully graduate without debt. Are we willing to help him out, if it's needed yes without a doubt we are. He's not your responsibility he's ours and we'll take care of our obligations.
Far too many of todays Deadbeat generation are badly misinformed. They think they're entitled to easy credit or any credit. Not so! Although it did appear to be that way for a while. When the Liberals thought home ownership and easy credit were a given and every American should own a home. Ray Charles can look around and see where that got us. All loans are meant to be repaid If you have no intention of repayinng a loan or credit card regardless of how high the interest rate or difficult the terms may be, the only important thing to remember is you agreed to comply with the contract, and when you refuse for whatever reason you become a deadbeat and part of the problem. There is no free lunch.
These problems are not brought on by Obama people,these problems have been building up for years.Republicans and Demacrats,its just starting to really hit the fan now,because there(country leaders) running out of loop hole and carpets to brush the dirt under.Our polititions have been giving this counrty away for years because they wanted to acommidate everyone for there vote to stay in office,between giving illeagel immagrents free passes and money for votes and extended unemployment benifits to the lazy for votes and many tax cuts for the rich for there support for campaining,to the younger generation for college money.It doesn't take a rocket scientist just to figure out that the S..H..I....T is evenually going to hit the fan.Unfortunatly Obama came in when it is at the brink of collapse.But personality i think it might have been good stategy for the republicans to let Obama in,just to get the people to go republican for the next few terms,because of the mess the republican did.I think Obama is doing his best to straighten things out,better than the republicans thought.
For the old timers,who think hard work and paying back a debt was just the right thing to do,i couldn't agree with you more.I love the old school ways and thats what made this counrty what it was.Thats right i said what it WAS.But on the other hand younger people are seeing what our countries leaders are doing to the American people and they dont like it.So the people cant find a way to get the government back on track,so they ease there frustration by sticking it to the man,sort a speak,and get away with anything they can,only seems fair.
For the old timers who think
Brilliant ! Nobody saw this coming ! A generation, that is famous for not paying their debts because they feel they are entitled to everything they didn't work for, is complaing about having to face their responcibilitieas.
Let's see. Who was it that encouraged the college students in 2009 to go ahead and assume more debt for a higher degree? Since there were no jobs seems logical, right? That person would be OBAMA.
The problem is the economy is still in the pits.
This is a case of Obama being the one to kick the can down the road. The only trouble is that millions of educated college students fell for his bull !
When I PUT MYSELF THROUGH COLLEGE, I worked THREE jobs - one on the weekends, one in the afternoon three days per week, and a midnight to four in the morning. I completed my B.S. with a GPA of 4.0 and had NO student loan debt.
It is hard to anyone who has earned their own way in this world to feel sorry for these spoiled rotten brats who don't have the backbone to work their way through college, but instead take out too many loans and then cry and whine about being in debt.
Grow up children!!!! Life is tough. And, the tough get going! The wimps fall by the wayside!
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