According to Mother Jones, the median income for Millennials has decreased by 10% since 2000 while average home prices have increased significantly from where they were in 2000. This massive gap is caused by a combination of stagnant (or even deflated) wages and a housing market roaring back to life after the 2008 era crash. It is often preventing many people under 35 from being able to purchase their own homes. Student loan debt isn’t helping either. But, should you consider saving for a down payment and buying a house with student loan debt still hanging over your head? The answer may surprise you!
But, sluggish income growth and unaffordable homes aren’t the only things holding younger potential homebuyers back. The average student loan burden of $37,172 – or $1.3 trillion spread out across 43 million borrowers – is another inhibiting factor.
Case in point: HousingWire reported in July of this year that the National Association of Realtor’s latest consumer survey found that two-thirds of non-homeowner Millennials with student loan debt did not feel comfortable taking on a mortgage.
Tips on Buying a House With Student Loan Debt
Are people born in the 1980s and beyond who used loans to get their education just doomed to renting forever, or is it really possible to save for a mortgage while also paying off your student loans? Yes, it’s possible, but there are a few considerations to make before throwing all your money in one direction or the other.
Losing Money on Renting?
Although there are plenty of costs homeowners have that renters don’t – such as maintenance, repairs, mortgage interest, property taxes, etc. – there are still so many more benefits of buying a home that makes renting seem like a waste of money if you’re able to choose ownership instead.
Trulia’s 2015 Rent vs. Buy Report found that across America’s 100 largest real estate markets, it was approximately 23% cheaper to buy a home than to rent one. This report targeted younger households (25-34 years old), with the assumption of only a 10% down payment instead of the traditional 20% standard.
What does this mean for you? Renting an apartment or home might actually be eating up more of your paycheck than a mortgage of your own would.
Despite the downsides of homeownership like maintenance costs, at least you’d be building equity in an appreciating asset instead of handing money over to a landlord every month with nothing to show for it at the end of the lease.
While keeping in mind the urgency of saving for your own home as a long-term cost-savings move, how do you balance that with paying off existing student loan debts?Should you save for a down payment on a house with student loan debt still hanging over you? Yes!Click To Tweet
Student Loan Forgiveness Programs
You hear in the news all the time about how student loans are almost impossible to get rid of, even if you declare bankruptcy, but did you know there are actually several student loan forgiveness options available?
Oftentimes, you’re required to serve your community in some way such as the Teacher Loan Forgiveness option for teaching in a low-income area for 5 consecutive years. And, you have to make some payments (120 monthly payments to qualify for the Public Service Loan Forgiveness option) before a certain amount or even the entire remaining balance will be discharged. Specialty loan forgiveness programs exist in certain states for doctors, lawyers, and other professions as well.
If your current career path doesn’t seem to fit the guidelines for these forgiveness programs, then you might also be eligible for the Pay As You Earn (PAYE) program, which caps your payments at 10% of your monthly discretionary income and forgives your outstanding student loan balance after 240 regular monthly payments. Although 20 years is a long time, the PAYE program offers the flexibility to save your leftover discretionary income for a mortgage down payment in the meantime.
There are other income-driven repayment plans for different life situations and types of loans taken out. Like the PAYE program, you’re expected to make regular payments for 20-25 years before loans are eligible for forgiveness and these payments are based on your discretionary income.
The U.S. Dept. of Education defines as, “the difference between your income and 150% of the poverty guideline for your family size and state of residence.” If you’re worried about overpaying student loan interest over the course of two decades, then don’t forget you can write off up to $2,500 on your taxes each year if your modified adjusted gross income is less than $80,000 per year.
An alternative to battling student loan debt on your own is to try finding an employer that will pay off your student loans for you. It’s an up-and-coming recruitment and retention tool that some corporations are using to attract top talent from pools of recent college graduates, and although this job perk is not tax-free, it can help you save more of your paycheck for a mortgage down payment.
Compare Interest Rates
If you don’t qualify for any federal forgiveness programs, your student loan refinancing options look bleak, and income-based repayment plans aren’t available to you (usually a problem for uninsured private loans), then your next step would be to compare interest rates.
A traditional bank’s savings account accrues an average of just 0.06% interest per year, which is no match for a student loan burden accruing interest at a rate of 3.76% to 6.31% per year (or 9-12% if you have private student loans).
Even a high-yield savings account with “generous” 1.00% APR would be more of a disadvantage if you had to choose between putting your limited discretionary income towards a mortgage and paying off higher-interest student loan debts.
Luckily, there are many ways to find extra money to help you save and by investing that additional cash, you could earn a 10% rate of return. Investing your mortgage savings instead of leaving the money to stagnate in a regular savings account will give you the greatest chance of surpassing student loan interest rates, which makes it a financially favorable option to save for a mortgage while making student debt repayments.
Low Down Payment Options
After the 2008 housing bubble burst, many lenders have been wary of extending mortgages to people who don’t have a sizeable down payment to offer upfront. In fact, if you don’t have at least a 20% down payment, you’ll probably end up paying private mortgage insurance for a while until you have enough equity to decrease your risk factor in the eyes of your lender.
Banks also impose restrictions on borrowers with significant amounts of debt; if your debt payments – including student loans, potential mortgage payments, and other debts – exceed 32-38% of your monthly income, then you probably won’t qualify for a mortgage until you further decrease your overall debt.
However, if you have good or excellent credit with a stable income then finding a lender willing to extend you a mortgage with less than 20% down isn’t too difficult. Just remember that the less you put down, the higher the interest rate on the mortgage will be.
This factor alone usually convinces people to take more time in saving for a down payment. But, luckily this delay won’t affect your student loan debt as long as you continue making regular payments.
If you’re adamant about buying a home sooner rather than later even with a low down payment, there are some options available. The Federal Housing Administration insures mortgage loans (known as FHA loans) and if you qualify, your down payment could be as little as 3.5% of the sale price. Veterans Affairs offers home loans to veterans and active duty service members, and generally, these loans don’t require any down payment for eligible borrowers.
Although taking out a mortgage with a low down payment is usually accompanied by higher interest rates, there are financial advantages reasons for buying a home sooner rather than later.
For instance, you could rent out one of the rooms and put your rental income towards student loan repayments. This would be perfect for a new home-buying couple who plans to start a family later but want to pay off their college debts first.
If home prices are mostly going to rise for the foreseeable future, then putting 100% of your nonessential income towards debt accruing at a fixed rate may not be the best option. The past several years of financial and home-buying trends have indicated that people under 35 are making debt repayments the #1 priority.
But, in reality, striving to simultaneously save for a mortgage while steadily paying off your student loans at the same time might be the best way to go.