Why College Debt Looms Larger On Mortgage Applications

BLOG VIEW: There are a lot of reasons why people go to college; one of the most basic is to earn more money. According to government figures, young adults with a college degree – those ages 25 to 34 who work full time – likely make $48,500 a year, versus $30,000 for those with just a high school diploma.

The catch is that marketplace realities are changing the numbers game. Millions of people are leaving college and technical or trade schools with a lot of debt – and that debt is interfering with family formations and homeownership levels.

A new study by Yuliya Demyanyk and Daniel Kolliner with the Federal Reserve Bank of Cleveland finds that “the most recent data indicate that there are now stark differences between borrowers with and without student loans.”

“With over 40 percent of young borrowers having a student loan, and debt payments comprising 20 percent of their income,” they write, “it makes it more and more difficult for young people to take on a mortgage in the first few years after attending college. And, as the number of student loans continues to rise, it is a trend that is likely to continue.”

The chart below from Demyanyk and Kolliner shows, in stark terms, what’s happening: Simply put, college debt has grown so burdensome that it’s increasingly a barrier to homeownership.

Figures from the Federal Reserve Bank of New York show that student debt is increasing at a rapid pace. Between 2005 and the third quarter of 2015, student debt grew from $390 billion to $1.2 trillion – a three-fold increase.

Unfortunately, while students have been racking up more and more debt, the economy has not received them with open financial arms. Yes, those with a college degree may earn more than individuals who did not continue their educations after high school; however, there is less money to earn. According to the Census Bureau, the median household income reached $53,657 in 2014 – 7.2% less than in 1999.

Student Loans Versus Mortgages

When it comes to mortgages, the student debt problem shows up in several forms:

First, most loans today are qualified mortgages, and that means, in the usual case, that not more than 43% of an individual’s gross monthly income can be used for debt service. As college debts have grown, there is less room under the loan-to-value standard for mortgage borrowing, and maybe no room for some borrowers.

Second, the Federal Housing Administration loan program, a popular option for first-time buyers, has new standards for student debt.

Many student loan borrowers obtain a repayment deferral lasting one to three years. In this situation, the debt remains in place, but because there are no monthly payments, the practice has been not to count the debt for mortgage qualification purposes. Now, however, under new rules from the U.S. Department of Housing and Urban Development, the deferred amounts will count in a big way: Lenders will have to factor in a monthly debt payment equal to 2% of the student loan balance. For a borrower who owes $20,000, that’s $400 per month – enough to sink many applications. For a newly minted attorney or doctor with $160,000 in graduate school bills, we’re talking about $3,200 a month in phantom debt payments.

“Student loan debt makes qualifying for a loan difficult under the Consumer Financial Protection Bureau’s new lending guidelines and makes affording a loan problematic for many recent graduates – this is especially bad timing in today’s market, where there is little inventory available of entry level, affordable homes,” says Rick Sharga, executive vice president of online real estate marketplace Ten-X. “Even more troubling is the amount of student loan debt accumulated by young adults who took out these loans but didn’t graduate. They have the burden of loan payments with less opportunity to secure higher-paying jobs.”

It’s hard to imagine that some students – and some parents – are now looking at college education in a new light. Though college was once a sure path to higher wages and a better life, that’s no longer so certain. As an example, one study of law school graduates found that 12 years after graduation, “solo practitioners in the class of 2000 reported a median income of just $50,000, with a full quarter of them reporting no income at all.”

What’s really happened is that the economy has changed at the very time students have piled up massive college debts. The debts remain in place, while the income needed for repayment is harder and harder to find. For many prospective mortgage borrowers, the net result is a reduced ability to qualify for financing – and in some cases, no ability at all. In the hunt for more and more mortgage borrowers, it turns out that student debt is increasingly a burden that’s tough to overcome.

Peter G. Miller is a nationally syndicated real estate columnist. His books, published originally by Harper & Row, sold more than 300,000 copies. He blogs at OurBroker.com and contributes to such leading sites as RealtyTrac.com, the Huffington Post and Ten-X. Miller has also spoken before such groups as the National Association of Realtors and the Association of Real Estate License Law Officials.


Please enter your comment!
Please enter your name here