How Student Loan Debt Is Holding Back First-Time Homebuyers

To find out more about how student loan debt is impacting first-time homebuyers and what can be done about it, we interviewed Bennie D. Waller, Ph.D., professor of finance and real estate at Longwood University and Bernard L. Weinstein, Ph.D., adjunct professor of business economics at Southern Methodist University.

Jun 15, 2014 at 8:27AM

The importance of first-time homebuyers to the overall health of the housing market cannot be understated. Today, the percentage of first-time buyers in the market is 29 percent, according to the National Association of Realtors, well below their peak presence of over 50 percent in 2009.

One of the main drivers preventing first-time homebuyers from entering the real estate market and taking advantage of historically low mortgage rates is high debt loads, mainly thanks to substantial student loan debts.

To find out more about how student loan debt is impacting first-time homebuyers and what can be done about it, we interviewed Bennie D. Waller, Ph.D., professor of finance and real estate at Longwood University and Bernard L. Weinstein, Ph.D., adjunct professor of business economics at Southern Methodist University.

Q: What role is student-loan debt playing in the current mortgage market?
Bennie Waller, Ph.D.
Professor of Finance and Real Estate at Longwood University

A: Student loans are reported to credit reporting agencies and are a factor in qualifying for a mortgage loan. Students with significant amount of debt will likely not qualify for a conventional mortgage due to the 28/36 mortgage lending guidelines. These are debt ratios suggesting that a borrower's mortgage loan cannot exceed 28 percent of their gross income and all debt cannot exceed 36 percent of gross income.

Here's an example of how debts impact your ability to qualify for a mortgage: A borrower earning $36,000 a year would qualify for $840 per month to go toward principal, interest, taxes and insurance (PITI). However, a borrower with that income but with $200 a month in student loan debt, a $200 monthly car payment and $100 a month in credit card payments would only qualify for $580 which could go toward PITI, thus significantly limiting the amount of mortgage they can qualify for.

If student loans are in deferment, prior to the housing crisis, many financial institutions would be liberal in their consideration of such loans; however, this has generally not been the case post-housing crisis.

Bernard Weinstein, Ph.D.
Adjunct Professor of Business Economics at Southern Methodist University

A: Since the beginning of the "Great Recession" in 2008, all major categories of household debt have decreased with the exception of student loans. Today, the total balance of outstanding student loans exceeds $1.1 trillion, an amount greater than all existing credit card debt. What's more, over the past two decades the average amount owed at graduation by students with a bachelor's degree has jumped from $10,000 to $40,000, while the average balance for graduate students has increased from $18,000 to $56,000.

Delinquency rates on student loans have doubled to 12 percent over the past eight years while they've been falling on credit cards, mortgages and auto loans.

Against this backdrop, and in view of tighter lending standards and larger down payments required by federal and state regulators, it's not surprising that growing numbers of prospective first-time homebuyers are unable to secure financing. In fact, homeownership rates in the U.S. are lower today than they were 20 years ago, with the biggest decline among those under the age of 30.

Q: What changes should be made to the student-debt landscape to make it easier for first-time buyers to purchase homes?
Bennie Waller, Ph.D.
Professor of Finance and Real Estate at Longwood University

A: Students must recognize the financial consequences of debt, which include student loans. Students that decide to incur large amount of student loan debt as the result of a lingering undergraduate degree or choosing to pursue an advanced degree must recognize that these borrowed funds must be repaid.

After making sacrifices to get a degree, it is certainly understandable that students want to enjoy the finer things such as not having a roommate, living in a new house, driving a new car and not eating fast food. However, they must first take responsibility for the debts they have incurred prior to enjoying the fruits of their new degree.

Finally, I am not a big fan of regulation, however, I do feel there is a need to better educate and limit the amount of student loan debt depending on a chosen degree. There is significant evidence that certain degrees are more lucrative upon graduation.

Bernard Weinstein, Ph.D.
Adjunct Professor of Business Economics at Southern Methodist University

A: There's no easy resolution to this dilemma. Debt forgiveness is not an option, and regulators are unlikely to weaken the recently adopted tough lending and collateral requirements for a home loan. Over the long term, more job creation and higher real incomes for younger workers offer the best hope for securing a mortgage and boosting home purchases.

This article originally appeared on HSH.com

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

More mortgage articles can be found on HSH.com:

Will marginal mortgage borrowers threaten housing recover?

Government regulation's role in the mortgage market

What is the future of Fannie and Freddie?

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers