The importance of first-time homebuyers to the overall health of the housing market cannot be understated. Today, the percentage of first-time buyers in the market is 29 percent, according to the National Association of Realtors, well below their peak presence of over 50 percent in 2009.
One of the main drivers preventing first-time homebuyers from entering the real estate market and taking advantage of historically low mortgage rates is high debt loads, mainly thanks to substantial student loan debts.
To find out more about how student loan debt is impacting first-time homebuyers and what can be done about it, we interviewed Bennie D. Waller, Ph.D., professor of finance and real estate at Longwood University and Bernard L. Weinstein, Ph.D., adjunct professor of business economics at Southern Methodist University.
Q: What role is student-loan debt playing in the current mortgage market?
Student loans are reported to credit reporting agencies and are a factor in qualifying for a mortgage loan. Students with significant amount of debt will likely not qualify for a conventional mortgage due to the 28/36 mortgage lending guidelines. These are debt ratios suggesting that a borrower's mortgage loan cannot exceed 28 percent of their gross income and all debt cannot exceed 36 percent of gross income.
Here’s an example of how debts impact your ability to qualify for a mortgage: A borrower earning $36,000 a year would qualify for $840 per month to go toward principal, interest, taxes and insurance (PITI). However, a borrower with that income but with $200 a month in student loan debt, a $200 monthly car payment and $100 a month in credit card payments would only qualify for $580 which could go toward PITI, thus significantly limiting the amount of mortgage they can qualify for.
If student loans are in deferment, prior to the housing crisis, many financial institutions would be liberal in their consideration of such loans; however, this has generally not been the case post-housing crisis.
Since the beginning of the “Great Recession” in 2008, all major categories of household debt have decreased with the exception of student loans. Today, the total balance of outstanding student loans exceeds $1.1 trillion, an amount greater than all existing credit card debt. What’s more, over the past two decades the average amount owed at graduation by students with a bachelor’s degree has jumped from $10,000 to $40,000, while the average balance for graduate students has increased from $18,000 to $56,000.
Delinquency rates on student loans have doubled to 12 percent over the past eight years while they’ve been falling on credit cards, mortgages and auto loans.
Against this backdrop, and in view of tighter lending standards and larger down payments required by federal and state regulators, it’s not surprising that growing numbers of prospective first-time homebuyers are unable to secure financing. In fact, homeownership rates in the U.S. are lower today than they were 20 years ago, with the biggest decline among those under the age of 30.
Q: What changes should be made to the student-debt landscape to make it easier for first-time buyers to purchase homes?
Students must recognize the financial consequences of debt, which include student loans. Students that decide to incur large amount of student loan debt as the result of a lingering undergraduate degree or choosing to pursue an advanced degree must recognize that these borrowed funds must be repaid.
After making sacrifices to get a degree, it is certainly understandable that students want to enjoy the finer things such as not having a roommate, living in a new house, driving a new car and not eating fast food. However, they must first take responsibility for the debts they have incurred prior to enjoying the fruits of their new degree.
Finally, I am not a big fan of regulation, however, I do feel there is a need to better educate and limit the amount of student loan debt depending on a chosen degree. There is significant evidence that certain degrees are more lucrative upon graduation.
There’s no easy resolution to this dilemma. Debt forgiveness is not an option, and regulators are unlikely to weaken the recently adopted tough lending and collateral requirements for a home loan. Over the long term, more job creation and higher real incomes for younger workers offer the best hope for securing a mortgage and boosting home purchases.
