There are currently 45 million Americans with student loan debt. Nearly one-fifth of these individuals have debt that is greater than $100,000 according to an article published by CNBC. This debt is making it hard for these people to get into their first home. But the real question is why it is so difficult to get into a home when you have student loan debt? To answer this question is to reveal why so many people are having to delay buying a home.
Nearly Impossible to Save Money
Student loan payments take a lot of money away from people every month. Many are just making ends meet, and do not have enough left over to put away. This lack of extra money makes it incredibly difficult for people to put money aside for a down payment on a home. The reality is that even though 86 percent of millennials believe that a house is a good investment, only 15 percent of these individuals have a mortgage according to Experian.
A big reason why many people get denied a mortgage is because banks do not like their debt-to-income ratio. They view student loan debt as unsecured debt. This means that there is no collateral to take in case you cannot make your payments. This is different from a home, for if you fail to make your payments, the bank can seize your home to save some of their investment. Individuals with student loan debt are stuck with it. Mortgage officers consider this when determining if you your overall expenditures is more than 36 percent of your income.
What is Your Credit Score?
It is estimated by the Brookings Institution that 40 percent of all borrowers are expected to default on their loans by 2023. In many cases, graduates who have taken on a lot of debt are struggling to find work to take on their student loan payments. If you have federal loans, you have options available to you, such as deferment and forbearance, that can protect you. However, those who have private loans do not have the same protections as federal loans.
When you default on your student loans, this takes a heavy hit against your credit score. A FICO score above 620 is considered a good score. Defaulters will have to find ways to heal to their credit score and get it back to a favorable level if they hope to get mortgage approved.
A Looming Crisis
The student loan debt crisis has been discussed heavily in recent years, and this is for a good reason. The effects of it have already affected other areas in country, in this case, the ability for this next generation to buy a home. It is the dream of many to own a home, but like a black cloud hanging over them, the reality of their student loan debt has made this a near impossible hurdle to get over.