Student Debt and it’s Impact on First Time Home Buyers.

Higher Education or a House: Can Young Americans Have Both?

by Ellen Haberle 

16 Percent of First-time Homebuyers Say Student Debt Has Kept Them From Buying

My husband and I would love to own a home, but right now we just can’t. Why? Grad school debt. Yep, we’re in our 30s, we both have great jobs and, as an economist at Redfin, I spend my days obsessing over real estate. But our crushing six-figure debt from graduate school means we will likely be the last of our friends to become homeowners.

Obviously, we’re not the only ones who have mountains of college loans to pay off. Last week, the Federal Reserve Bank of New York reported that student loan debt rose more than 5 percent in the fourth quarter of 2013 and now exceeds $1 trillion.

Redfin’s Q1 homebuyer survey suggests that these rising debt loads are delaying homeownership among young Americans. From Feb. 20 to 23, Redfin surveyed 1,912 home-buying clients, of which 965 were buying a home for the first time. Among the first-timers,16 percent said that student debt had previously kept them from buying a home.

* First-time homebuyer respondents only

Of these homebuyers surveyed, 33 percent said that student debt had led them put off a home purchase for one to two years while 31 percent said four years or more.

* First-time homebuyer respondents only

Despite these statistics, Redfin Open Book Lender, John Wheaton, said home buying is still attainable for many student debt holders. According to Wheaton, “Many young people with student loans delay buying a home because they don’t think they can qualify for a mortgage. Yet, many of them actually can. Underwriters generally treat student debt in a more positive light than credit card or auto loan debt.”

For example, a person with $45,000 in student loans (about $500 per month for a 10-year term), a FICO score of 741 and an income of about $75,000 per year could likely qualify for a property starting at around $375,000 with a 5 percent down payment, Wheaton said.

When we do the math, my husband and I could technically afford to buy a home right now. But it feels risky. If one of us lost a job, could we still pay a mortgage and make our school debt payment? We probably couldn’t.

For others, buying now would mean sacrificing on the home they really want. According to Redfin agent Alex Haried, “For my home-buying clients, student debt hasn’t prevented them from buying a home, it has prevented them from buying the home they want. Instead of buying a $350,000 home, they would rather rent for a few more years as they pay down their student debt and then buy a $500,000 home.”

With tuition costs soaring, potential homebuyers in the future may have even bigger debt hurdles to overcome. From 2008 to 2013, annual tuition for a public four-year universityrose 20 percent to $18,391, according to the College Board. For graduate students, tuition growth is even steeper; the cost for a Master’s in Business Administration grew 33 percent between 2008 and 2012. For a top-tier MBA program such as the one at Duke University, students dole out $110,600 in tuition.

More Student Debt, Fewer First-Time Home Sales

As if young Americans aren’t already strained by a weak job market and rising home prices and mortgage rates, climbing tuition costs give them one more reason to put off buying a home. The National Association of Realtors said last week that the share of existing home purchases by first-time buyers slipped to 26 percent of sales, down from 30 percent last year. For the economy as a whole, this means that rising student debt loads — which should, in theory, be a positive sign of a more educated workforce — may be a short-term hindrance to the housing recovery.

 

Falling Mortgage Debt Offsets Rise in Consumer Debt

BY JANN SWANSON

Falling Mortgage Debt Offsets Rise in Consumer Debt

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Aug 14 2013, 1:32PM

In spite of a huge surge in auto loans, Americans reduced their overall household debt by $78 billion during the second quarter the Federal Reserve Bank of New York said today. Total household indebtedness fell to $11.15 trillion in the second quarter, a decrease of 0.7 percent from Quarter One and 12 percent below the peak debt of $12.68 billion reached in the third quarter of 2008.

The declining debt was due in large part to a reduction in its largest component, mortgage debt, which fell $91 billion from the first quarter to $7.,84 trillion. Balances of home equity lines of credit (HELOCs) declined as well, by $12 billion to $540 14billion.  Mortgage originations rose for the seventh straight quarter to a total of $589 billion.

While outstanding student loan debt and credit card balances each increased by $8 billion during the quarter it was auto loans that kept overall debt near Q1 levels. Auto originations totaled $92 billion in the quarter, the highest level since the third quarter of 2007 and outstanding auto loan debt increased $20 billion, the ninth consecutive quarterly increase and the largest in that sector since 2006.

The rate of 90+ day delinquencies for all household debt declined to 5.7 percent from 6.1 percent in Q1 and the rate for every individual component of household debt also fell. The mortgage delinquency rate was 4.9 percent, down from 5.4 percent and HELOC delinquencies fell from 3.2 percent to 3 percent. Nonetheless 200,000 individuals had a new foreclosure notation added to their credit reports during the quarter, the first increase since Q1 2012.

 

 

"Although overall debt declined in the second quarter, households did increase non-housing debt, led by rising auto loan balances," said Andrew Haughwout, vice president and research economist at the New York Fed.  "Furthermore, households improved their overall delinquency rates for the seventh straight quarter, an encouraging sign going forward." 

The Federal Reserve Bank of New York's Household Debt and Credit Report is based on data from the New York Fed's Consumer Credit Panel, a nationally representative sample drawn from anonymized Equifax credit data. The report provides a quarterly snapshot of household trends in borrowing and indebtedness, including data about mortgages, student loans, credit cards, auto loans and delinquencies. 

Hope you find this information useful.

Best Regards, Chris Mesunas

 

5 Ways to Woo Lenders

 

Getting the lender to aprrove your mortgage is stressful. Make sure you everythings on track so your loans gets approved fast. Here are some quick tips I found that might help you.

The requirements needed to obtain credit have toughened since the financial collapse of 2008, which was largely caused by homeowners who were given mortgages they could not afford.

For a bank or lender to approve you for a mortgage, your financial house needs to be in perfect shape. Getting your finances on track takes time, but here a few steps you can take to make your situation more attractive to lenders:

1. Credit history

Your credit score keeps track of how well you manage other people's money. And if you have a poor credit score (below 700), the banks won't even talk to you, since that means you haven't managed money well in the past. In fact, most of the banks will be checking your FICO score, which is a slightly different formula.

Also see: Can Your Facebook Posts Ruin Your Credit Score?

To raise your credit score, for three to six months, pay your bills on time and pay your credit card balances off in full, instead of simply paying the minimum payment.

A higher credit score will also allow you to be approved for a lower interest rate on the home loan – and this will result in a lower monthly payment. Lower credit scores result in higher interest rates, since the lender has to be compensated for the additional risk involved in approving you for a mortgage.

2. Debt

Debt is toxic to your credit score and affects your utilization ratio (that's how much debt you have vs. how much credit you have access to).

But if you're close to paying off your debt, the lender may be willing to throw you a bone. "Lenders do not count debt against a potential borrower when they have less than ten payments left on the loan," says Malcolm Hollensteiner, director of lending sales and products at TD Bank. "Though for those with $25,000 in debt or more, this can take years."

[Click here to check mortgage rates in your area.]

3. Proof of income

The reasons why consumers were given mortgages they could not afford pre-financial crisis was because there was no due diligence on the bank's end to verify if the consumer had the income needed to pay back the loan. Times have changed and expect lenders to conduct a thorough vetting process of your finances.

"Home buyers often need to furnish previous W-2 forms, pay stubs and tax returns," says Debra Goodrich, executive vice president of home loans at Sterling Bank. "If making a significant down payment, a lender may want to verify bank or investment company statements as well as any large deposits."

Also see: 7 Top Mortgage-Shopping Mistakes To Avoid

4. Down payment

The more money you can put down on the home purchase, the less money the bank has to lend you, which means you'll owe less money.

Increasing your down payment shows the banks how your financial situation is more secure and they'll be more willing to lend you a smaller amount.

Banks want to see that you have some skin in the game, too.

5. Stay off the credit cards

Once your mortgage has been approved, you'll still have a few weeks, if not months, before closing on the new home. During this time, the banks will continue to monitor your finances – and any drop in your credit score could jeopardize your mortgage.

Hopefully you can impress those lenders and get that mortgage! Dont worry you can do it!