There’s a generation of people who may be avoiding or delaying homeownership because they’re already facing an overload of student loan debt.
Today’s recent college graduates carry more student loan debt than any generation before them. Even people who finished college a decade ago are still working to pay down what seems like an insurmountable debt load. This debt load can make buying a house seem like an impossibility. However, considering that as a renter you are likely paying someone else’s mortgage, homeownership may be more attainable than you believe.
Good Debt vs. Bad Debt
We often talk about “good” debt. That seems counterintuitive, we know. What kind of debt could possibly be good? Well, it’s pretty simple; “good debt” is any debt that helps you build wealth.
That’s why so many people have borrowed thousands of dollars to go to college—statistically, having a college degree means one could earn nearly an extra million dollars over their lifetime (source).
Similarly, some people could justify borrowing money for a car, if that car is essential to getting them to work every day. If losing access to transportation would mean losing your job, then borrowing money to buy a reliable car might qualify as good debt.
The best kind of good debt is a mortgage. Borrowing money to buy a house gets you started toward a lifetime of building wealth and security. We urge everyone to make homeownership part of their financial plans both in the short and long term. If for example you own your home when you retire and your loan is paid off, not having a rent or house payment will make living on a fixed income vastly easier.
Managing Student Loans & Mortgage
While getting into a mortgage is a positive thing, many people simply feel like they just can’t make it work especially when facing tens of thousands of dollars in student loan debt.
First, it’s important to ensure that your overall credit and credit scores are strong. Make payments on time, keep balances as low as possible, and don’t do anything to shorten the length of your credit history (i.e., don’t close your old accounts, even when you pay them off).
Then, you have to figure out your debt-to-income ratio. Read up on The Basics of Debt-to-Income-Ratios, and do some math. If your student loans, coupled with a potential mortgage, would lead to a debt ratio that a mortgage lender wouldn’t approve, talk to a mortgage coach or a student loan counselor about what you can do to get your debt-to-income ratio under control.
Some things you might consider will include increasing your income, consolidating your federal student loans, reviewing the Department of Education’s (DOE) website for a number of federal loan repayment options, or working to eliminate your other debts, like credit cards.
Another step at this stage is first-time homebuyer education. This will help to ensure you are aware of special down payment assistance programs and take all the right steps throughout the homebuying process.
When you are ready, talk to a mortgage broker or lender about getting pre-qualified for a loan. Then you’ll know how much you can afford to buy before you start shopping for a home.
Saving up for a Down Payment
You don’t need a huge down payment to buy a house. Sure, it’s great to have 20% of the home’s price saved up before borrowing, but if your credit score is good enough, you can get an FHA (Federal Housing Administration) loan with as little as 3.5% down. Mathematically, you’re better off getting into a mortgage now and starting to earn equity than to wait until you’ve accumulated a full 20% down payment.
Even saving up 3.5% of a home’s purchase price can be a challenge, and it will be a good test of whether you are ready for homeownership. If you can keep making your student loan payments, pay your current rent, and save up 3.5% toward a mortgage, then you’re probably financially ready to tackle homeownership.
It’s very important to bear in mind that your first home doesn’t have to be your dream home. You might sell your first home and move up to something bigger in 6-10 years. Don’t expect the first home you ever buy to have everything. After a few years of building equity, developing your career, and paying down student loans, you’ll be in a great position to make your second home one you’ll want to live in for decades.
Should I Wait?
Some people may advise you to put off buying a home until your student loans are completely repaid. We think it’s important to point out that approach has some disadvantages.
First, you lose the potential equity you would start building. As soon as you start making house payments, you start building wealth. And as property values rise, your home will be worth even more. It’s important not to think of homeownership as a short-term investment—the idea isn’t to get rich quick, it’s to build financial security over a lifetime.
If you are in your thirties and you put off homeownership for another ten years, you’ll make it less likely that you will be able to pay off that mortgage by the time you retire. Having high housing expenses when you transition to a fixed income is a situation you want to avoid.
Second, being a homeowner brings some serious tax advantages that you would be forgoing if you wait to buy a house. Get into homeownership now and start reaping the tax benefits, along with the equity building.
Third, you cannot know what the future holds. Interest rates are reasonable, and while they could go a little lower, it’s much more likely that they will go up. As this article is being written, the average fixed rate mortgage rate is 4.28%. Ten years ago, the average was 6.03%, and ten years before that,10.34%. The lowest we’ve seen in recent decades was 3.65%, so yes it could go down a bit, but the historical averages are much higher than what we see today. So now is a good time to consider getting into a home, and waiting a few years could cost you even more in increased interest rates.
It’s important not to worry too much about fluctuations in the market—home buying is a long-term endeavor, so if values rise or fall in the short term, it shouldn’t concern you. You could be in the home for 10 years, and over that time, you’re much more likely to see an increased property value while you build up significant equity from your regular mortgage payments.
When Waiting is the Right Move
Waiting to become a homeowner can be a good idea if you aren’t in a place in your life where you can settle down. If you think your career is likely to have you moving within a few years, then it makes less sense to get into a long-term mortgage now.
Whether or not to wait is a lifestyle decision—will you be having kids soon? Are you where you want to be for the foreseeable future? While those are valid considerations, student loans should not be the factor that makes you wait to become a homeowner.
It bears repeating—you borrowed money to get a degree so you could build a better life for yourself. Homeownership should be part of that life, and you shouldn’t let student debt keep you from purchasing a house.
Don’t forget, you don’t have to go it alone. If you’ve got student loan debt that is making you doubt your ability to buy a home, get nonprofit homebuyer coaching so you’ll know exactly what you need to do become a successful homebuyer.