One of the key parts of the job for any mortgage originator during the loan qualification process is an accurate calculation of a borrower’s debt-to-income (DTI) ratio. Any student loan debt held by a mortgage applicant will impact the DTI equation. And just as pandemic-related relief from mortgage and rent payments have subsided in recent months, the federal student loan forbearance program will end on Jan. 31, 2022, forcing many borrowers to resume payments.
“That will cut into the ability for homeowners or potential homebuyers to save,” says Jessica Lautz, vice president of demographics and behavioral insights for the National Association of Realtors (NAR).
Student loan debt is a topic that NAR has studied since 2013. In NAR’s most recent report on the subject, released this past September, 29% of the nearly 2,000 surveyed respondents reported that student debt had impacted their ability to buy a home. Among this group, about half believe they can’t save for a downpayment or qualify for a mortgage.
Meanwhile, student debt holders who bought a home from 2014 through 2017 spent an average of $27,000 less than other buyers, NAR reported in a separate study this past April. It’s often more difficult for student debt holders to find homes in their price range and it can be more challenging for them to build long-term wealth through homeownership, Lautz says.
“We do see the amount of student debt that potential homebuyers are taking on is growing,” she says. “We have seen that some people have had relief in the last year with stimulus packages. They’ve been able to get ahead on their debt and pay that down, perhaps because they’ve cut spending on entertainment, but they’ve also moved to more affordable areas that have allowed them to get ahead of their debt.”
There are changes afoot to help student debt holders more easily qualify for a home loan. This past October, the federal government announced a yearlong effort to forgive portions of student loan debt for borrowers employed in public service jobs. The U.S. Department of Education has had a public service forgiveness plan in place since 2007, but more than 90% of applicants have been rejected despite making payments that were supposed to qualify.
In June 2021, the Federal Housing Administration (FHA) updated its policies regarding student loan debt. Previously, FHA lenders were required to assume that many home-purchase applicants’ monthly student loan payments were 1% of the total debt. This cap was recently lowered to 0.5%, bringing FHA closer to the standards used by other types of mortgage programs.
“I can qualify so many more people based on that,” says Lauren Maxwell, a Naples, Florida-based executive vice president for CrossCountry Mortgage. “FHA is such a phenomenal program that gives so many higher (DTI) ratios that you can use in qualifying somebody. Very rarely do I have to say to somebody, ‘OK, these student loans make you not qualify at all.’”
Similar to NAR’s findings that student loan debt is negatively impacting homeownership potential, online real estate company Zillow also reported that the climate has changed in recent years. In 2015, Zillow research concluded that market participants should “stop blaming student debt” for weak demand among first-time homebuyers. It found that college graduates with a bachelor’s degree or higher were relatively insulated from the adverse effects of student debt when buying a home while the proportion of renters to homeowners was “relatively constant at varying levels of student debt.”
Today, however, Zillow is singing a different tune. This past April, it reported that student debt as a share of all household debt had jumped by 143% from 2007 to 2020. Homeownership rates among 28- to 34-year-olds who attended college dropped from 60% in 2007 to 49% in 2019.
“The main storyline over the past decade or so is that tuition and home prices have risen a lot faster than incomes have, so while people who go to college and get a college degree typically have higher incomes, that income isn’t growing as fast as their debts,” says Nicole Bachaud, an economic data analyst at Zillow.
A potential silver lining to this trend is that a significant portion of Generation Z will be reaching its prime homebuying ages in the next 10 years. Bank of America predicts that this population will have more wealth than millennials by 2031. Some studies suggest that Gen Zers will have less student debt than their predecessors. And a Rocket Homes survey of 1,400 Gen Z respondents found that 86% are interested in purchasing a home, with nearly half looking to do so in the next five years.
“The Great Recession didn’t really impact a lot of Gen Z folks. They were still children at the time,” Bachaud says. “That’s definitely another thing to think about, is just the other kind of generational factors that didn’t impact both of these younger populations in the same way.” ●