Student Loan Debt Roadblock to Homeownership
More kids are going to college today than ever before. From an academic perspective, that’s a great thing. From a real estate perspective, it’s a cause for concern because of debt they face after they graduate, and how it impedes their ability to buy a home for the first time.
According to the National Association of REALTORS® (NAR) 2018 Profile of Homebuyers and Sellers, the share of first-time home buyers fell for the third straight year to 33 percent. Prior to the end of the first-time buyers’ credit in 2010, the rate of sales to first-time homebuyers was 40 percent – or higher.
“Low inventory, rising interest rates and student loan debt are all factors contributing to the suppression of first-time home buyers,” NAR Chief Economist Lawrence Yun said in a statement. “However, existing home sales data shows inventory has been rising slowly on a year-over-year basis in recent months, which may encourage more would-be buyers who were previously convinced they could not find a home to enter the market.”
The biggest hurdle for first-time homebuyers is saving for a down payment, and according to the NAR data, 50 percent of respondents said that student loan debt was the chief roadblock to saving for that down payment. A whopping 40 percent of first-time buyers surveyed indicated they had a median debt of $30,000.
“Even with a thriving economy and an abundance of job opportunities in many markets, monthly student loan payments coupled with sky-high rents and rising home prices make it exceedingly difficult for potential buyers to put aside savings for a down payment,” said Yun.
Even though down payments are as low as three percent now, most respondents are putting down much more. The median down payment was 13 percent, a three percent increase from 2017 and the biggest percentage since 2005. First-time homebuyers saw a two percent increase from 2017, up to seven percent – the highest since 1997.
However, there are tools available to first-time homebuyers that can make the path toward home ownership a little smoother.
Some states have adopted first-time homebuyer savings accounts, where individuals or couples can save money – tax free – in a savings account at a local bank to go toward the down payment of a future home purchase. In some states, parents and grandparents can contribute to this account.
There are many federal loan programs that can be of assistance as well:
- Veterans Affairs (VA) loans – These loans are insured by the U.S. Department of Veterans Affairs for certain veterans, service members, spouses and other eligible beneficiaries. They don’t require a down payment or mortgage insurance but do charge a one-time funding fee of 0.5% to 3.3%, depending on the type of loan, the size of the down payment and the nature of your military service.
- U.S. Department of Agriculture (USDA) loans – The U.S. Department of Agriculture insures home loans for low-to moderate-income homebuyers in eligible rural areas. Like VA loans, there is no down payment for a USDA loan. But there is an upfront fee of 1% and an ongoing annual fee of 0.35%, both of which apply to purchases and refinances.
- Federal Housing Administration (FHA) loans – Insured by the U.S. Department of Housing and Urban Development (HUD), borrowers can get an FHA loan with a down payment as low as 3.5%. Additional fees include an upfront mortgage insurance premium of 1.75% and an annual mortgage insurance premium of 0.45% to 1.05%, depending on the type, size and length of the loan and the size of the down payment.
- Conventional loans – Some mortgage lenders offer small down payment mortgages—as little as 3% down payment (HomeReady) —to borrowers who qualify. These loans, however, aren’t insured by a government agency, so the lender will require private mortgage insurance (PMI). The cost of PMI varies but is often between 0.5% and 1% of the loan amount. You can typically request to have your PMI dropped once you have at least 20% equity in the home.
NAR conducted its survey in July by mail among a weighted random sample of recent homebuyers. A total of 7,191 responses were received from persons who had purchased a primary residence between July 2017 and June 2018.
For more tips and resources for first-time homebuyers, click here.
Be an informed homeowner. Learn more about the impact of student load debt on the housing market and your community.