NeighborWorks America Survey Reveals Student Debt Holding Back Homebuyers
59% of Millennials Report Knowing Someone Who Has Delayed a Home Purchase Due to Debt
NeighborWorks America released its 6th annual housing survey in September, revealing something many already suspected: high student loan debt is a barrier to homeownership for many potential buyers. And the impact is greater for younger buyers and women. (read the news release here)
Student debt can make it tougher to buy a home, but it doesn’t have to make homeownership impossible. Whether owning your own place is near or on the distant horizon, these are three ways you can get closer to your goal:
- Build that credit score.
When you apply for a mortgage, your credit score will be one of the biggest factors in your interest rate. One big way of building credit is having a long credit history. If you haven’t already, get a good credit card & pay it off every month. By paying it off on time every month you can start building your credit while doing very little to change your overall debt or monthly budget. An easy way to do this is to use the card for just one recurring bill – something like your phone or internet – and then set up an automatic payment to the credit card. When your student loan payments come in, make sure to make every payment on time. This helps build a positive credit history.
- Reduce your debt-to-income ratio
When you feel you’re close to buying a home, it’s time to look at your debt-to-income ratio. Many lenders use the 28/36 ratio, which means what you pay for your house shouldn’t be more than 28% of your gross income, and your overall debts shouldn’t be more than 36%. By adding up your potential monthly housing payment plus all your other monthly debt payments, you can test the likelihood you’ll get approved for a mortgage. If it’s too high, you can reduce debt-to-income ratios in two ways: by increasing your income or decreasing your debt. Consider consolidating loans or using income-based repayment. If it feels overwhelming, look for help! There are loads of free services meant to help you refinance student loans or see if you’re ready for a mortgage.
- Prepare for your down payment.
It’s never too early to start thinking about your down payment. If homeownership is a distant goal, try setting aside even $10 or $20 a month to save for it. If that seems like a lot, or homeownership is closer, explore the pros and cons of low down payment loans, such as FHA, USDA, or VA. It may also help to explore down payment assistance programs in your area.
Having student loan debt doesn’t mean you can’t own a home. These small steps will be a great way of getting you on the path. And remember – there are experts out there, ready and eager to help. If you want to learn more, make an appointment with a housing advisor. Whether homeownership is an immediate or distant goal, they will help you create a plan so that you can reach it on your timeline.
About the Author:
As an AmeriCorps VISTA serving for a year with Neighborworks, I hope to increase Neighborworks’ capacity to serve the community by understanding and responding to the customer experience. Although my background is in psychology and mental health, I’ve come to the area of community development because I’m excited about broader-scale social change. I am also an advocate of sustainability, both for business and in everyday life. In my free time I enjoy writing and I am an enthusiastic pianist.
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