Being told that your student loan debt makes you unable to qualify for a home mortgage can feel defeating and frustrating. But it may not be a bad thing…
Being told that your student loan debt makes you unable to qualify for a home mortgage can feel defeating and frustrating—especially when your rent is much higher than a monthly mortgage payment would be, home ownership tops your list of financial goals, or you simply want to establish roots and feel like you’re a Grownup.
While your sense of disappointment is legitimate, being turned down for a mortgage because of student loan debt may not be the financial roadblock it seems—once you dig into the financials of home ownership.
Owning a Home Doesn’t Guarantee a Return on Investment
You’ve probably heard the tales of homeowners whose property values skyrocketed since they bought. All the while, you’re writing a monthly rent check that feels akin to flushing money down the drain. It may seem like an injustice—until you compare the long-term historical performance of the stock market to the residential real estate market:
- The S&P 500 has produced compound returns of about 9.53 percent from 1928 to 2016.
- Though home prices have increased as much as 5.8 percent nationally over the last two years, according to the January S&P/Case-Shiller Home Price Index, the national average home value is still down by about 20 percent since 2006. Those homeowners may have fared better if they’d invested their cash into stocks.
Still not convinced? Nobel prize-winning economist Robert Shiller has also publicly supported the notion that investing in the stock market is a better way to build wealth, compared to buying a home.
Owning a Home isn’t Cheap
Calculate what you’d pay on a monthly mortgage compared to your rent, and home ownership may appear to be a financial slam dunk. Yet owning a home involves inherent costs those calculations don’t include.
For example, if you’re a homeowner:
- Researchers at the University of Illinois suggest you should expect to spend 1 to 2 percent of the purchase price of the home on basic home maintenance costs each year.
- Property taxes typically increase over time based on property value adjustments and local tax codes; they’re a yearly expense.
- In addition to homeowner’s insurance, you may need to purchase additional insurance policies if you live near water or in an area prone to natural disasters.
- Major plumbing, electrical, and structural issues can cost you big time—unless you’re very handy and have an extensive tool collection.
- You may need pay for city services, which can include water and trash removal.
Owning a Home Makes it Harder to Move
Renters can choose not to renew a lease if they’re not happy with the home’s condition, the cost of rent, or want to change neighborhoods. Moving isn’t so easy, or inexpensive, for a homeowner. It may take a homeowner several months to find a buyer, and there’s no guarantee they’ll be able to demand a price equal to what they’ve invested in the home. Additionally, sellers may need to pay commissions to real estate agents, invest in additional home improvements to satisfy potential home buyers’ requests, and cover fees associated with the home inspection, closing, and title transfer.
Buying a Home with a Low Down Payment Equals a Higher Mortgage
If you’re paying down student loan debt and wondering how to buy a home with a small amount of savings, there are many loan programs available. But they may cost you more in the long run than delaying home ownership for a few more years. Some conventional mortgage loans require private mortgage insurance (PMI) when you can’t make a down payment of least 20 percent of the home’s purchase price; the PMI may apply until you have 20 percent home equity, based on its original appraised value. Though some FHA loans may require a down payment of just 3.5 percent of the home’s purchase price, they may require you make a monthly mortgage insurance premium payment for at least 11 years, and potentially for the life of the loan.
Whether you’ll pay any type of mortgage insurance (and its amount) depends on the loan type, your credit score, and the loan amount, among other factors. Any way you slice it, it’s an added cost of buying a home you can avoid if you wait until you can make a larger down payment.
Borrowing Less Could Mean Owning Your Home Outright Sooner
The amount of your student loan debt can make it difficult to obtain loans that consider debt-to-income ratio (DTI). Though it may take time to pay down student loan debts, credit card balances, and other loans that impact your DTI, you may benefit from getting your finances in order before you buy a home. For example, if you can make a significant down payment upfront, you can reduce the total loan amount. Or, you may consider a shorter-term mortgage loan of 15 years, instead of 30 years or longer. That may mean owning your home outright long before you retire—and paying a lot less in interest over the life of the mortgage.
The real estate market is cyclical: What goes up will inevitably come down. Putting your dreams of home ownership on hold because of student loan debt may not be your ideal scenario, but it doesn’t mean you’re robbed of the opportunity to build wealth via the stock market or elsewhere.
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