Living With Debt

The Truth About Buying A Home When You Have Serious Student Loan Debt

By | Friday, January 08, 2016


These days, everywhere you look, coverage of student loan debt — and how it impacts millennials’ futures — is simply everywhere. The average 2015 college graduate has roughly $35,000 dollars in debt. That’s no joke. And with debt repayment plans extending out as far as 10-30 years, it’s a burden that follows young people for a long time. With all the coverage that student loan debt receives, you’d assume that one was screwed when it came time to eventually think about buying property…but not me.

Recently, a friend asked me, “will it be tough to get a mortgage with the amount of student loan debt your household will have at that time?” I paused for a moment, opened my mouth to respond, but stopped myself. I didn’t have an answer. I had never even considered the possibility that my future husband and I would have THAT much difficulty obtaining a loan from the bank to fund our mortgage. I was shocked that I had never bothered to research whether or not it actually would be a challenge to obtain a mortgage. I blindly assumed that “everyone has student loan debt,” so how could it possibly be something that would be counted against so many of us so severely and make us ineligible for a loan? Needless to say, I dove into reading up on this matter. I wanted to uncover whether we would be swimming upstream, so to speak, right from the get go. Were we already at a huge disadvantage?

I researched and consulted with a finance professional on the matter. I found a number of useful resources that have put my student loan debt, and the potential repercussions on my financial health, into perspective. For example, when I researched the specifics of getting a mortgage, I learned a bit about what mortgage lenders really want to see in your financial history. The answer is fairly straightforward — they want to identify whether or not you can repay the loan. While there is a lot of speculation about what they look for and the degree to which they weigh certain factors, your assets, creditworthiness, and job history all play a role.

That being said, your student loan debt will probably have the biggest influence on your credit score (which is not immediately damaged simply because you have a loan). 360 Degrees Of Financial Literacy uses the metaphor of the 800-pound gorilla in the room saying, “If you’re repaying your student loans on time, then the gorilla is behaving nicely, and is actually helping you establish a good credit history. But if you’re seriously delinquent or in default on your loans, the gorilla will turn into King Kong, terrorizing the neighborhood and seriously undermining your efforts to get other credit.” See? Not an  immediate danger.

What are the challenges of having student loan debt?

The most significant challenge of having student loan debt is exercising the tenacity, diligence, and patience to make payments on time and consistently over a set period of time. However, this repayment period can be bumpy if job security is uncertain and/or if an individual doesn’t have the funds to actually make those monthly payments. Below are a few details of how student loans get repaid and the different options available. *However, it’s worth saying that if you are opting for either a loan forbearance or deferment it’s probably not the best time to be taking on more debt.*

Loan Forbearances. These are granted on a case-by-case basis for individuals who can’t make their scheduled loan payments but don’t qualify for a loan deferment either. Forbearances essentially allow people to postpone repayment of their student loans for a fixed period of time. According to the Federal Student Aid website, “You may be able to stop making payments or reduce your monthly payment for up to 12 months. Interest will continue to accrue on your subsidized and unsubsidized loans (including all PLUS loans).”

Loan Deferment. When you opt for a loan deferment, you’re asking for a period during which repayment of the principal and interest of your loan is temporarily delayed. Sometimes, the government will take care of paying the interest on the student loan that’s in deferment. According to the Federal Student Aid website, either a Federal Perkins Loan, a Direct Subsidized Loan, and/or Subsidized Federal Stafford Loan are loans that the government might be responsible for paying the interest on. However, the government doesn’t pay the interest on unsubsidized loans. These interest payments can be quite sizeable depending on the principal of the loan, so it’s essential to research all aspects of both loan forbearance and deferment before choosing any of these options. They come with their own set of consequences which shouldn’t be treated lightly.

Paying off a loan too quickly might be damaging. In my research, I was shocked to discover that repaying off student loans too quickly might actually damage one’s credit score. According to an article I came across on Student Debt Relief, it stated,

Paying off your student loan early may actually damage your credit score. Student loans are installment loans which, unlike credit card debt (revolving credit), it does not look better to creditors to have the lowest balance possible. Future creditors understand that a student loan means there is no larger balance of available credit and that your monthly payment will not change over the lifetime of the loan.

Since paying off an installment loan early can mean a loss of income (interest) on the loan to the lender, it may actually send the wrong signal to potential future creditors and lenders.  This can mean future loans with a shorter term, but a higher interest rate so they will get a better return on their loan to you.

So, you can see that there is a sweet spot when it comes to the timeline in which you need to pay off your student loans. It’s not about just proving you’re capable of paying down debt, it’s also about doing it in a way that’s beneficial to lenders. There are a number of nuanced factors that contribute to your overall desirability as a candidate for a loan.

While having student loan debt doesn’t immediately equal a worsened credit, it might result in you being scrutinized and questioned by a mortgage company. The truth is, having student loans affects your Debt-To-Income Ratio. According to this article on Bankrate, it says that the ratio is just one factor that lenders use to decide whether a buyer can afford a mortgage payment. They also write, “Generally, mortgage lenders prefer a debt-to-income ratio of 36 percent or less.” Whether student loans are included in DTI depends on the type of loan and whether the payments are current or have been deferred.  Large student loans require large monthly payments that remain fixed throughout the lives of the loans. But, if you’ve repaid a significant amount of the balance, you may be able to refinance and reset the monthly payment to be more appropriately sized to the new balance.

However, despite what articles online may say, having student loan debt isn’t all bad. There are actually some benefits of having student loan debt. Money Crashers writes,

Student loans are considered a “good” type of credit, and having them on your report will help you quickly get a solid FICO score – as long as you make the payments on time.

You can utilize this long-standing debt to your advantage as a way to build good credit. Just be responsible.

Are the challenges posted by Student Loan Debt insurmountable?

In short, no. However, it’s essential to look at your debt compared to the overall amount of money you’re bringing on each month. The issue of getting a mortgage is not only about credit — it’s also about resources. Even if you’re responsible, the lender will most certainly look at the amount of debt you have and take it into consideration. The kind of mortgage you qualify for might be different than the one you might have qualified for sans loan. That being said, the ability to make timely and consistent loan payments is largely in your hands. If you are responsible, organized, diligent with paying back the money you owe, and fortunate enough to have found a decent-paying job, there’s little reason having student loan debt would mean your creditworthiness would automatically take a hit. Do your own research, print out your free credit report, and call you student loan provider if you have any questions. Everyone’s student loan repayment journey will be different. However, we should all aim to be as informed and well read as possible, and use student loan debt to our advantage.

Below are some additional readings that will help you understand the correlation between student loan debt and your financial future:

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