Buying a Home with Student Loan Debt – Boulder Real Estate Agent
If you are looking forward to buying your first home but wonder how student loan debt might affect your ability to buy a home, you are not alone.
Of recent graduates of U.S. colleges and universities who have taken out student loans, the average amount of student loan debt is about $30,000. But the mean student loan debt provides only part of the picture. Many recent graduates, especially those who took part in masters and doctorate programs, carry student loan debts that exceed $100,000. More than 40 million Americans have student loan debt, now totaling more than $ 1.6 trillions dollars. All of this debt has created a major obstacle for home ownership. Voices as varied as the National Association of Realtors and progressive politicians such as Senator Elizabeth Warren (D-MA) and Representative Alexandria Ocasio-Cortez (D-NY, 14th District) have discussed the need for legislation to address student loan debt.
While political action to address student loan debt is necessary, in the meantime homes are being bought and sold, values have continued to appreciate (with few exceptions) and millions of people who would otherwise be buying their first home have had to continue renting, often with roommates, or living with parents into adulthood. Fortunately, if you are one of the millions of young Americans putting off home ownership, you need not abandon hope. There are important options you should be aware of that may allow you to purchase a home despite having student loan debt.
First, we are going to dispel one of the biggest myths about purchasing a home with a mortgage: that buying a home requires a significant amount of money down (it’s often misunderstood that 20% down is required). The misconception derives from an esoteric sounding form of insurance called Private Mortgage Insurance (PMI). PMI is insurance that mortgage lenders have borrowers (home purchasers) pay when the loan-to-value ratio (Mortgage Amount / Appraised Value Amount) is above a given figure. For most mortgage lenders, that figure is .8 (80%) for conventional loans. In other words, if you are buying a new home and put down less than 20% for a down payment, your lender will usually require PMI be paid, on top of interest, principal, taxes and property insurance. The price range for PMI can vary depending on the purchase price of the property and the loan-to-value ratio. In Boulder and the North Denver metro area it is common to see payments ranging from $100 to $175 per month for first time home buyers. Importantly, PMI is not permanent. There are various ways to get rid of PMI early, which vary depending on your lender, but lenders typically require two to five years of payment history and proof of a loan to value ratio of .78 or .8 (sometimes more recent appraisals showing appreciation can be helpful).
If you are a veteran of the U.S. military and are eligible for a U.S. Department of Veterans Affairs (VA) home loan, PMI is not required. The essential element of a VA home loan is that it is insured by the VA, making PMI irrelevant.
As long as you are okay with paying for PMI or if you are a veteran who is eligible for a VA home loan, and you have a steady income, you may be able to obtain a loan that requires less than 20% down. Lenders will sometimes offer loans for 5% or 3% down, and, on occasion, they will also provide grants to new home buyers. Some local governments offer grants to help first time home buyers. Check with a mortgage lender to determine if you can qualify for a loan and what grants, if any, you may be eligible for.
In the past, individuals on Income Based Repayment (IBR) plans who were attempting to qualify for mortgages were saddled with a burdensome way of calculating monthly student loan payments. Rather than allowing for calculations based on the actual monthly payments, which are directly tied to income, the rules required that a monthly payment equal to 1% of the total outstanding balance of the loan be stipulated as the monthly payment. So, an actual monthly payment, which was calculated based on income could be dramatically inflated, leaving potential borrowers unable to purchase a home. Student loans that are deferred or in forbearance can still end up being calculated as 1% of the total outstanding loan amount, but with this new approach results are often much more accommodating, allowing some potential buyers who otherwise would not have been able to qualify to become home owners. While more accommodating to people with student loan debt, the rules are still complex and can vary significantly depending on a number of factors, including the type of loan (e.g., Fannie Mae Conventional, Freddie Mac Conventional, FHA, VA or USDA), so it is best to speak with a loan officer about your options.
Although there will invariably be a lot of new words and acronyms you will encounter while learning about your options, and discussions about financing options can get very complex very quickly, the gist is that there are options. Too often potential purchasers are scared off before even starting the process, assuming there could be no way they could own a home given their student loan debt. That reluctant self-selection out of the home market by people who definitely do want to own their own homes is something that we at Royal Arch Real Estate believe should be a thing of the past as soon as possible. While some may not be able to qualify, many others may be able to qualify. If you are part of the latter group do not hesitate to reach out to us. We can help you with the process and put you in touch with good people who may be able to help you obtain a loan. Once you are pre-approved, the home buying process is essentially the same as it is for anyone else buying a home with a new loan.
If you are looking for a Boulder real estate agent with a results oriented approach tailored to your specific needs, contact Royal Arch Real Estate. We are knowledgeable and experienced brokers who always have your best interests at the forefront of our minds, whether you are buying or selling a home, vacant land or a new construction.