Accelerating student debt could prevent millions from accessing homeownership
Almost one in 10 probable student borrowers with an income-based repayment plan have less than 28% of their monthly income remaining to cover housing costs, which disqualifies them from most mortgages.
Half of renters and 39% of buyers delayed their decision to buy a home due to student debt, according to a Zillow poll.
Growing student indebtedness risks putting many potential buyers – especially buyers of color – very close to or above conventional debt ratios, excluding them from home ownership before they’ve even applied for a mortgage.
Tuition and fees at public universities rose from $ 6,189 in 2007 to $ 11,260 in 2020, according to US News and World Report, an increase of 81.9% – and many students are increasingly relying on student loans to help them with rising costs. In 2007, student debt represented only 4.4% of total household debt. By 2020, that figure had more than doubled to 10.7%, an increase of 143% over a 13-year period that far exceeds tuition hikes in the state. And as the student debt burden increased, homeownership rates among 28-34 year olds attending university declined from 60% in 2007 to 49% in 2019. Zillow poll Data from 2019 revealed that half of renters and 39% of buyers delayed their decision to buy a home due to student debt.
There are nearly 43 million borrowers across the country who owe an estimated $ 1.6 trillion in federal student loans. As lawmakers continue to debate the topic of canceling student loans, an idea has been launched in favor of eliminating $ 10,000 in debt to help ease the income burden on borrowers, bringing down typical student debt. at about $ 25,000.
Debt-to-Income Ratio (DTI) represents the amount of a borrower’s monthly debts relative to their overall income, and like any other debt, student loans are considered by lenders as part of a DTI calculation that helps to determine their capacity. to incur additional mortgage debt. Zillow estimated that a $ 10,000 reduction in the typical student loan burden could allow about 1 million likely student borrowers (those with a standard 10-year repayment) to more comfortably pay a monthly mortgage payment while still meeting usual DTI thresholds. Under this scenario, an additional 171,000 potential student borrowers on an income-based repayment plan could also come to hand to access homeownership.
A hard constraint
Credit ratings that rise alongside tuition fees and student debt levels suggest borrowers are finding ways to make ends meet, likely through increased income. But debt levels can only get so high before they start to weigh on borrowers – especially those willing to take on more debt to buy a home. At some point, there is no room for maneuver in a household budget, and finances are hit hard by debt-to-income ratios.
Calculating the DTI is pretty straightforward: if a borrower has a monthly income of $ 5,000 and their monthly debts (credit card bills, car payments, student debt, etc.) add up to $ 1,000, then their DTI is 20. % (monthly debt payment of $ 1,000 is 20% of $ 5,000 of total income). In most cases, the highest DTI a borrower can have and qualified mortgage loan is 43% for loans taken out by the Federal Housing Administration, or 36% for many conventional mortgages.
But the levels of 43% and 36% reflect total debt, including pending mortgage debt – and since a mortgage is typically the biggest loan most people will apply for, mortgage debt is naturally a large component of overall IMD. The highest DTI allowed for mortgage-related costs alone (including principal, interest, home insurance, property taxes, and private mortgage insurance payments, if applicable) is 31% for a FHA loan and 28% for a conventional loan. Thus, as student debt increases and represents a larger share of total household debt, the remaining leeway to add substantial mortgage debt while remaining within acceptable DTI standards decreases.
Do not make it work
Take the example of a potential buyer who attended college, is in his prime age for buying a home, and is likely paying off college loans. Suppose their young household earns the 2019 median income of potential buyers of $ 60,000 and is responsible for the average total student debt of $ 35,205 in 2019 (Note: the average student debt burden of $ 35,205 in 2019 is very close to the total of $ 36,178 over four years in – 2012-2015 tuition fees, according to US News). If the household repays this debt over 10 years at the July 2019-June 2020 average 4.5% federal interest rate for undergraduate borrowers (probably a conservative assumption, since a large chunk of student debt is held by private lenders at higher rates) their monthly payment would be $ 364.86. With a monthly income of $ 5,000, the permanent DTI for this household – due to student debt alone – is 7.3%.
If this household purchases the typical house of US $ 272,446 with a minimum down payment of 3.5% and applies to a 30-year fixed rate mortgage at the current interest rate of 3.17%, their monthly mortgage payment would be $ 1,132.69. Together, this borrower’s mortgage and student debt would amount to $ 1,497.55, or 30% of their monthly income. This leaves them a wiggle room of just $ 300 / month to take on additional debt without exceeding the conventional loan DTI threshold of 36% – not enough, for example, to pay off a typical used car payment. $ 397 per month.
Almost one in ten (9%) probable student borrowers on an income-based repayment schedule have such a high student loan burden that it does not exceed the standard DTI housing threshold. This number jumps to over 50% for those who follow the standard 10-year repayment route. For Black and Latinx households, the impact is even greater. Over two-thirds (68.7%) of black households and a majority of Latinx households (52.6%) that are likely student borrowers likely spend more than 28% of their monthly income on housing. Assuming their current housing cost burden remains the same with a mortgage as they do as a tenant, these borrowers would be excluded from most mortgages.
Consider the math for a typical Black household, with a median income of $ 43,600 in 2019. Assuming the same level of debt as above, this household’s IMD from student debt only is 10%. A combined monthly student debt and mortgage payment of $ 1,497.55, on a monthly income of $ 3,633, would bring their overall DTI to 41.2% – just below the acceptable threshold of 43% for an FHA loan. But at 31.2%, their mortgage-only DTI exceeds the conventional (28%) and FHA (31%) thresholds, indicating that this household could not afford the typical American home.
Millennial and Gen Z homebuyers face very real budget pressures, and while a college degree is part of the American dream for many, so is owning a home. For years the two have worked hand in hand: the higher incomes that usually come with getting a college degree have helped make homeownership more accessible. But as the cost of higher education grows faster than wages, college graduates take on significant debt as they age in the peak years of home buying, delaying some home purchases and falling into disuse. disqualifying others.
The population examined in this analysis is taken from the 2007-2019 American community surveys. It is made up of tenant households in which at least one decision-maker (head of household, spouse of the head of household or unmarried partner of the head of household) is between 28 and 34 years old and has attended at least one university. We assumed that this population had student loans and was still paying them back. We assumed that the total value of each individual’s student loans was equal to the average value of student loans for the year for which the ACS sample was taken.
We assumed student loan payments were made either at the payment of a typical 10-year loan at the average annual interest rate or at 10% of discretionary income (modeled on income-tested repayment plans) , whichever is smaller. Discretionary income is determined as the difference between household income and 1.5 times the state level poverty line for household size. We used the poverty guideline for the 48 contiguous states and Washington DC for all states – we did not include the poverty guidelines for Alaska and Hawaii separately.
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