Don’t Let Student Loans Keep Clients from Buying a Home

Millennials are getting ready to buy homes - finally. The National Association of Realtors (NAR) reports that buyers aged 36 and younger are now the biggest generational group of homebuyers in the market. “The largest cohort in America is growing up and becoming more traditional in their buying habits,” according to the latest NAR Home Buyer and Seller Generational Trends Report.

Millennials might be interested in buying homes, but that doesn’t mean it’s easy for them. One of the factors holding back some would-be homeowners is student loan debt. In fact, 41% of Millennials have postponed buying a house or apartment because of their student debt. (For more, see: Money Habits of the Millennials.)

If you have clients interested in buying but they’re reluctant due to student loan debt, there is hope. Here’s how you can help Millennials get into homes, even if they have student loans.

The first step is to get real with Millennials. This is a generation that appreciates honesty. Sit down with your client and tell it like it is. Help them go through their finances and evaluate their reasons for wanting to purchase a home.

Realize that some of the reasons for buying a home have changed. A recent survey from SunTrust Mortgage found 33% of Millennials want to buy in order to provide more space for their dogs. Many buyers are more interested in a bigger living space and building equity, but accommodating pets ranked as a higher priority than getting married or having children. Keep these goals in mind as you move forward.

Map out your client’s lifestyle. Do they intend to stay put for a while? Are they interested in security and safety? Is there a good chance they want to integrate into a community? Your clients should feel confident that they will stick around and that their lifestyle calls for a permanent home, rather than a rental they can vacate quickly.

Next, look at your client’s finances. The presence of student loan debt doesn’t have to be a deal breaker. What’s more important is whether someone has stable income and can manage their debt payments with relative ease. If they can make their student loan payments, or are even contributing to a retirement account, and could conceivably make a monthly mortgage payment with relative ease, they could be ready for a home.

If your client isn’t financially ready to buy a home, be prepared to tell them the truth. But be encouraging. Someone might not be ready today, but you can provide a roadmap to homeownership - even with student loans. (For more, see: Millennials Are Risk Averse and Hoarding Cash.)

Many Millennials are wary of credit. Only 33% of those aged 18 to 29 even have credit cards, according to a 2016 Bankrate survey. While the number of Millennials with credit cards increases once they reach age 30, the fact remains that they just aren’t that into credit cards.

As a result, they might not have established credit histories that allow them to be accurately represented by many of the most popular credit scoring models, such as FICO. Because credit is the biggest factor considered by mortgage lenders, it’s important to educate clients about the need to improve their credit.

Help your clients create a credit-building strategy that might include getting a credit card and using it for a few small purchases each month. Impress upon clients that they should pay off the balance every month to avoid debt and interest charges. Show Millennials that credit can be a financial tool and, when used properly, can be incorporated into their long-term goals.

Of course, would-be homeowners can also boost their credit by paying down some of their non-student loan debt (if they have it) and staying on top of their bills. Emphasize to your clients that missing payments,  including student loan payments, can damage a credit score and reduce their chances of being approved for a mortgage.

After credit score, mortgage lenders are likely to look at debt-to-income (DTI) ratio. This is where student loans can have a huge impact on a client’s ability to get a mortgage. In many cases, according to the Consumer Financial Protection Bureau, lenders like borrowers to have a DTI of 43%. That includes the proposed mortgage payment. (For more, see: The Importance of Millennial Consumers.)

A prospective homebuyer with a monthly income of $3,700 shouldn’t have monthly debt payments totaling more than $1,591. According to the Student Loan Hero repayment calculator, someone with $65,000 in student loan debt on a standard 10-year repayment with an average interest rate of 5.7% can expect to pay $712 each month. That doesn’t leave a lot of wiggle room ($879) for car loan payments, the actual mortgage payment, and any other debt payments.

However, just because it’s possible to qualify with a 43% DTI doesn’t mean it’s the best choice for a client. Instead, consider steering clients toward the 28/36 qualifying ratio. It’s a better measure of capacity. With this measure, clients are encouraged to keep mortgage-related expenses to 28% of monthly income, with total debt (including the potential mortgage payment) amounting to no more than 36% of monthly income.

In any case, however you look at it, a student loan payment could be enough to push that DTI beyond an acceptable level. Getting into a home might require the client to consolidate federal loans and extend the term to 20 or 25 years. They can also refinance using a private lender, potentially resulting in a lower rate and extended loan term.

Using the example above, it’s possible to see how refinancing could help. That same $65,000, refinanced at 3.5% over 15 years, drops the monthly student loan payment to $465 - much more manageable alongside a mortgage payment.

Finally, there’s a good chance you’ll have to help your clients map out a plan to save for a down payment. Brush up on FHA loan rules. For clients who know they will have a small down payment, it’s good to understand the options. Help them set up a savings plan that will allow them to reach a down payment goal in a reasonable amount of time.

Buying a house with student loans isn’t impossible. However, it does require a little extra planning. Help your clients pay attention to credit score, DTI and the down payment, and they should be able to prepare to achieve their dream of homeownership. Just make sure the choice fits the lifestyle and helps your clients reach their long-term financial goals. (For related reading, see: New Help for the Millennial Money Dilemma.)