Industry Insight: Homebuying with Student Debt: Myths and Facts
December 29, 2016
By gaining insight into the impact of student loan debt on both underwriters and potential mortgage borrowers, you have an opportunity to position yourself as a go-to advisor for the growing number of prospective homebuyers dealing with student loan debt.
In doing so, you may enjoy tangible business growth, as well as the less tangible satisfaction of helping first-timers achieve homeownership. But the first step involves fact-finding and busting some prevailing myths about student debt.
Freddie Mac's Cynthia Waldron, Quantitative Director of Affordable Lending Analytics and Research, and Renae Sherman, Director of Data Strategy at Experian, recently presented results of a joint study of mortgage readiness among Millennials (18-34 years old).
The study included data from 11.6 million people, 3.5 million of whom were Millennials. Here's Waldron's take on four common notions about Millennials and student debt:
- Myth or Fact? Student loan debt keeps Millennials from qualifying for a mortgage.
Myth. The study found that, of those with student loans, those loans made up some 64 percent of their total debt. But the impact of these loans on mortgage qualification varies because of other factors. And so, Waldron says, "This is simply too blunt of a statement."
"I don't want to downplay student loan debt," Waldron continues. "It's part of your all-in debt. Our research showed that while holding everything else constant, a 10 percent increase in student debt decreased the likelihood of purchasing a house by 4 percent. Other research I've read shows that it's a greater problem for those with student loans who didn't finish college."
It also affects those whose college degree qualifies them only for moderate gains in income, she notes. In other words, student debt is more likely to be a negative factor in mortgage readiness for those who have taken on this debt but haven't yet achieved the return on investment of a higher income.
The bottom line, the study showed, is that a large pool of Millennials, including many with student loans, are ready for a mortgage. In particular, the study showed that of those that are mortgage-ready, about 75 percent are ages 30-34.
About one-third of Millennials in the study have student loan debt, and their loan payments average four to seven percent of their monthly gross income. "Given our data snapshot," Waldron concludes, "the impact of student loan debt is not as high as other factors like house prices or income." She cautions, though, that additional research is needed to paint a more complete picture.
- Myth or Fact? Student loan debt keeps Millennials from seeking a mortgage.
Fact. Waldron notes that misconceptions about mortgage criteria may cause many mortgage-ready individuals to assume they cannot qualify. "They think you have to have 20 percent down and a really high credit score," she says.
For the nearly mortgage-ready, Waldron points out that many Millennials don't know how to use credit as a tool. They may think that not having a credit card is a good thing. What they may not realize is that they could increase their credit score by using and paying off a credit card, or that they won't have to pay interest if they pay off the balance each month.
In light of these prevalent misconceptions, Waldron believes that one effective business strategy is educational outreach. Through educational initiatives, local lenders can help consumers in their communities recognize their mortgage readiness, student loan debt notwithstanding.
- Myth or Fact? Millennials whose student loan debt pushes their debt-to-income (DTI) ratio above 43 percent cannot qualify for a mortgage.
Myth. The Consumer Finance Protection Bureau's (CFPB) "ability to repay" rule, or QM (Qualified Mortgage), sets DTI at 43 percent. Waldron acknowledges that Freddie Mac has a bit of leeway that warrants a small buffer. In the mortgage readiness study, a DTI of less than 45 percent was used as the criterion for mortgage readiness.
More significant, of course, is the misconception that student loan debt is what pushes consumers' DTI up over 43 or 45 percent. With this debt making up only four to seven percent of their monthly gross income for many borrowers, as noted above, other factors creating a high DTI may be more important or more easily rectified than student loan debt.
And of course, DTI is only one of several important underwriting criteria. Credit score, as well as past foreclosures, bankruptcies or delinquencies, also come into play
- Myth or Fact? Millennials whose student loan debt pushes their DTI above 45 percent will remain unable to qualify for a mortgage significantly into the future.
Myth. Local lenders have a great opportunity to help Millennials in their communities to achieve homeownership, Waldron points out, because many Millennials are capable of lowering their DTI relatively quickly.
For example, she notes that many Millennials in the study's "near-ready" category are age 18-25. "They're just starting to use their first credit card, and they're just starting to land jobs that pay well," she says.
Specific to student loan debt, monthly payments may be lowered through debt consolidation and other programs. With this trifecta of opportunities for many Millennials to raise income, lower debt payments and improve one's credit score migrating from near-ready to mortgage-ready is achievable in short order.
Waldron encourages community lenders to "look at the whole package" as they assist those with student loan debt to qualify for a mortgage.