With student loans, can you afford a home?
- When your money goes to student loans, you have less for other things.
- Lenders focus on monthly debt payments, not total debt owed.
- Extending the terms of student loans can help grads afford to buy a home.
You're young, have a good job and want to buy a home. But you don't think you can afford a home because you're weighed down with student loans.
You might be in luck. There are ways to afford a home, even while coping with payments for student loans.
In recent years, it appears fewer people with student loans have bought homes. A recent Federal Reserve study finds that 9 percent of 29- to 34-year-olds got a first-time mortgage from 2009 to 2011, compared with 17 percent 10 years earlier.
The study doesn't conclude that student loans are responsible for the decline in homebuying, says Mark Kantrowitz, publisher of FastWeb.com and FinAid.org. Still, Kantrowitz says he hears from young adults burdened with student loans. When some of your income goes toward payments for student loans, "You have less to invest in other things, whether it's retirement or getting married or buying a home," he says.
It's not the balance, it's the monthly payment
While grads may obsess about how much and how long they'll pay for college, "I don't believe lenders really give a hoot about your total balance," says Paul Baumbach, financial planner in Newark, Del.
Lenders focus primarily on how much income goes toward debt payments, says Charles Chedester, president of the Iowa Association of Mortgage Brokers.
The total student loan balance does figure in somewhat, however, "to the overall risk analysis," says Allyson Knudsen, senior vice president for Wells Fargo Home Mortgage. Although she adds, "It certainly isn't a reason we would decline your application."
In the monthly analysis, lenders figure out what percentage of your pretax income goes toward debt obligations, such as payments for credit cards and student loans.
Then, they factor in what a mortgage payment would add if you buy a home. Usually, Knudsen says, the amount going to your mortgage and other monthly debt shouldn't exceed roughly 40 percent of gross monthly pay, adjusted up or down slightly depending on your credit score and other factors.
Extending the student loan debt can help mortgage eligibility
For those whose monthly income is already heavily sliced with student loans, extending the repayment term can leave more room for a mortgage payment, making it easier to afford a home.
"For example, increasing the term on an unsubsidized Stafford loan from 10 years to 20 years cuts the monthly payment by a third," Kantrowitz says. But by extending the term, you'll end up paying about twice as much total interest over the years.
Various methods exist for extending student loans. But, Kantrowitz notes that probably the most common way to extend a term is to consolidate separate student loans into one with a longer repayment.
How important is it to buy a home?
Extending student loans can make room for a mortgage, and it may also allow you to save to buy a home later, Baumbach says.
Indeed, although it may be possible to afford a home by getting a Federal Housing Administration-insured mortgage with a small down payment, lenders want to see emergency savings, too, Chedester adds.
Baumbach says it's financially smart to buy a home when mortgage payments are manageable, they compare favorably to what you would pay in rent, and "you're sure you'll stay there a few years."
Many young adults, he says, need to be able to move anytime for a new job. Some will decide they don't want a home badly enough to extend their student loans or skimp to get the necessary savings.