July 25, 2017

How Student Loan Debt Can Wreck Your Chance of Buying a Home

Newly graduated students lucky enough to get a job after graduation have to overcome many hurdles on the path to home ownership including establishing a good credit score, saving for a down payment, and being able to show enough income.

In addition to the standard barriers to home ownership listed above many new graduates trying to become first time home owners also face the increasingly serious problem of dealing with student loan debt.

The amount of student loan debt outstanding has been growing at an exponential rate, almost tripling since 2007.  We won’t even examine the merits of whether or not taking on huge student loans results in securing a job that pays enough to make student loan debt a sound investment but it is an issue that individuals should closely examine before burying themselves in debt.

student-loans

 The amount of student loan debt is so onerous to many newly graduated students that the government has instituted a large number of debt payment deferment programs.   When the future monthly loan payment was deferred the FHA frequently acted as if the debt did not exist and an estimated monthly loan payment for student loans was excluded from the debt ratio.  This allowed many borrowers to be approved for an FHA loan that they otherwise would have been turned down on if the student loan debt were taken into account.

Recognizing that many borrowers approved for an FHA loan might later face major difficulties in making their monthly mortgage payment the FHA has changed the rules to take student loan debt into account.

Debt burdens

 A spokesman for HUD explained why the changes in accounting for student loan payments were both necessary and realistic.  Brian Sullivan of HUD stated that “Deferred student debt is debt all the same and really must be considered when determining a borrower’s ability to sustain both student debt payments and a mortgage long term.  Our primary interest is to make certain that a first-time homebuyer is put on a path of sustainable homeownership rather than being placed into a financial situation they can no longer tolerate once their student debt deferment expires.”

 The new rules are sound and ultimately attempt to protect new homeowners from future financial stress and default.  On the other hand, students coming out of college with loads of student loans should plan on waiting longer before purchasing a home.