Will Student Loan Debt Kill My Chance to Buy a Home?
Meghan Webber  Greater Lansing Association of REALTORS  Carrying any significant debt is a potential obstacle to homeownership, but there is one type in particular that is weighing down many potential buyers: student loan debt. According to May 2021 census data, 43 million Americans have student loan debt  thats one in every eight Americans. And, according to the Federal Reserve, student loan borrowers in the United States owe a collective $1.74 trillion in federal and private student loan debt as of the first quarter of 2021. With interest rates at historic lows, many hopeful buyers are considering jumping into the market. But for those with student loan debt, they may be wondering if it could affect their ability to obtain a mortgage. How student loan debt is impacting buyers  According to the National Association of REALTORS 2020 Home Buyers and Sellers Generational Trends Report, 24% of all homebuyers reported having student loan debt. Of those with outstanding student loans, 46% were ages 22 to 29, 38% were ages 30 to 39, and 23% were ages 40 to 54. Those with debt  including student loans and other forms, such as credit card debt, car loans, etc.  say debt hindered their ability to save for a down payment by a median of four years and came primarily from student loan debt.  While you dont need to be 100% debt-free to qualify for a mortgage, lenders do look at your debt-to-income (DTI) ratio when they consider you for a loan. Your DTI ratio is the total amount of debt you have compared to your overall income. In general, experts say you want to aim for a DTI ratio around 36% or lower, but some loan programs allow for ratios as high as 45% to 50%, depending on compensating factors like credit score and/or down payment. As an example, if you pay $150 for your auto loan, $125 in minimum credit card payments, and $250 in student loan payments each monthand are hoping to buy a home with a potential mortgage of $1,200your total monthly debt would be $1,725. If your gross monthly income is $5,000, then your DTI would be 35% ($1,725/$5,000). Its important to note that if your student loan is in deferment, it is still counted toward your DTI. Generally, most lenders use 1 percent of the total deferred loan amount to determine a monthly payment, but it depends on the loan program. So, if a borrower is paying $80 a month on a deferred loan of $100,000, the loan program may require the lender to consider 1% or $1,000 towards the DTI instead of the $80. Aron Clark, vice president and senior mortgage banker with Dart Bank, says like most financial questions, there is no one-size-fits-all answer. Whether your loan debt disqualifies you or not depends a lot on the loan program youre trying to qualify for because they each weigh student loan debt differently, he said. Even within conventional products, student loans are handled differently. Currently, I would say FHA is probably the most restrictive while Freddie Mac is the most lenient, but again, its all situational.  And there may be niche products available for particular occupations. Physician loans are probably the most well-known, occupation-specific program. According to the Association of American Medical Colleges, in 2020, 73% of medical school graduates had student loan debt, and the median amount was $200,000. In addition to carrying a high debt load, new physicians dont often have an established work history, and they typically have little money saved, due to the modest salaries of residents. This makes it difficult or impossible for them to qualify for a traditional mortgage. However, some lenders make allowances for this unique situation by offering specialty products. Dart Bank, for instance, offers a physician loan which includes zero down payment for loans up to $500,000with no private mortgage insuranceand if the borrower has student loan debt in deferment, its not included in the DTI ratio. While all the news of mounting student loan debt can be discouraging, keep in mind its just one of the components considered in your mortgage application. Lenders look at a variety of factors such as gross monthly income, credit history and score, equity position (or down payment), time on the job, and assetsjust to name a few. I think a lot of people assume their student loan debt will automatically disqualify them from mortgage approval, but more often than not, we are able to get borrowers approved, said Clark. Even if you dont qualify now, we can talk about steps to get you in a place where you can possibly be approved in the near future.  For a list of local, professional lenders, visit the Greater Lansing Association of REALTORS website at www.lansing-realestate.com.