How significant is student loan debt when it comes to Americans’ ability to buy homes? Common belief is that crippling student debt is preventing many college graduates from saving for a mortgage down payment and missed loan payments are ruining their credit scores.
Although these factors do account for lower homeownership rates among recent graduates, new numbers show that the impact is minimal. Here’s a closer look at how student loans and mortgage eligibility are related.
New Student Loans and Mortgage Data
A new study from Zillow reported student debt has a negligible effect on your probability of homeownership, as long as you graduate with at least a bachelor’s degree.
College graduates with a four-year degree and no student loan debt have a 70 percent probability of owning their own homes. That probability drops by a mere 4 percent for a bachelor’s degree holder with $50,000 in student debt.
Although qualifying for a mortgage loan or saving a down payment can be challenging when managing significant debt, the research shows student loans don’t have to be a major hurdle of homeownership — and aren’t for most grads.
If at least one spouse has a four-year degree and no student loans, a married couple’s chance of owning a home is about 69.8 percent. If that same couple shares $30,000 in student debt, their chance of homeownership drops slightly to 67.7 percent – a 2.1 percent difference.
The same marginal effect of student loans holds true even at the graduate school level. Individuals with a medical, law or doctoral degree have the highest probability of owning their homes, despite the steep price tags that often accompany graduate school.
Graduating with no loans from a master’s degree program gives you an 80 percent probability of owning your own home. Add $50,000 in student loans to the mix and your probability drops just 5 percent.
According to the study, attaining higher level of education insulates borrowers from the negative effects of student loan debt when they are ready to buy.
Associates or No Degree
Possessing less than a bachelor’s degree is where sensitivity to loans increases. For someone with an associate’s degree as their highest level of education, the probability of owning a home drops dramatically from 73 percent with no debt to 57 percent if they graduate with $50,000 in student debt.
Those with no degree fare the worst; the probability of owning a home starts at 48 percent and declines from there if a student accumulated student loan debt but did not receive a diploma.
Are You Ready to Buy a House?
Even though student loans have little effect on homeownership for most graduates, other factors should be considered before you buy a house.
One of the most important factors that student debt does impact is your debt-to-income ratio (DTI). Lenders calculate DTI by dividing your total monthly debts by your gross monthly income. If you already have a hefty student loan balance or other debts, such as credit cards or a car payment, your ratio of income-to-debt might exceed lender limits. Combat this by paying off your highest loan balances to bring down your DTI.
Also consider what you can realistically afford. Your annual income, monthly debt and down payment savings all factor into determining a reasonable mortgage payment. Plug the numbers into a calculator and play around with the figures to find out how much house you can afford. Your results can help determine whether you’re ready to seek out lenders or need to delay the purchase until you sort out your finances.
The impact of student loans on your ability to buy a home has been long overstated. It’s time for a new narrative. Student loans are one of several financial considerations of your home purchase. Doing the math and knowing your options will help you determine your priorities — whether that’s paying off your student loans or house hunting.