A lack of knowledge about the home buying process is one barrier people often encounter. Another large barrier is on the topic of debt.
Debt affects every other step of the home buying process, and we’ll talk about that in a moment. We’ll start with the number one barrier to homeownership that people cite: down payments.
First-time Home Buyer Down Payment
According to a recent survey by Zillow, the number one factor people say is preventing them from achieving homeownership is the inability to save for a down payment. Over two-thirds of renters stated that a down payment is their biggest impediment when it comes to becoming a homeowner.
While this makes perfect sense, we think most people are not looking at the root cause of their problem. We believe they’re telling the truth about down payments being a big obstacle, but why can’t they save up a down payment? What’s preventing them from setting aside the money they need to attain homeownership?
The answer is most likely debt. Every dollar they commit to repaying debts is money that could be going into saving for a down payment. If they were able to pay off excessive debts or even reduce their debt burden each month, they’d have more money available to save.
Starting With a Smaller Down Payment
Many lenders are now offering low down payments loans with help for closing costs and other incentives for first-time homebuyers. An FHA government loan is also designed to help those with lower down payment funds, with as little as 3.5% of the purchase price needed. For qualifying Veterans, there are loans available for zero down payments. So down payments aren’t as big a problem as most renters think.
Debt-to-Income Ratio for Home Loans
Another barrier to homeownership is having too much debt.
Our budget guidelines include 20% set aside for saving and/or debt. If your monthly revolving debt payments are more than 20% of your monthly income then there is a problem, and we recommend debt counseling right away.
If one can pay debts with less than 20% of their monthly paycheck, then we recommend saving whatever is leftover. And as the remaining debt is paid down, keep putting the same amount into savings. So if you are putting 12% of your income toward debts, you’ll put 8% into savings, and if you pay down your debt and only 10% is earmarked for debts, increase your savings to 10%. Ultimately, the goal is to have no debt payments and the full 20% going to savings.
The money saved could go toward a down payment for a home, or any other savings goal (such as your future retirement).
We know it’s easier said than done when paying off debts and saving money. We’ve helped people do those very things for over 40 years. We have time-tested coaching, advice, and strategies for making progress toward financial freedom, and credit counseling are offered free of charge.
How Student Loans Affect Homeownership
Today’s record-high student loan debt levels make it hard for would-be homeowners to qualify for mortgages. But some relief came earlier in 2017 when Fannie Mae changed underwriting requirements to borrowers with student loans.
With loans for borrowers on an income-based repayment plan, lenders used to base their debt-to-income ratio on a percentage of the total student loan debt owed. Now they use the actual monthly student loan payment in the calculation, making it easier for borrowers with student loan debt to qualify for mortgages. The reason this helps is that it allows borrowers on income-based repayment plans to get relief based on their actual student loan repayment situation, not the total debt they owe.
While Fannie Mae’s changes will help student loan debtors get into homeownership, many recent college graduates don’t want to buy a home even if they could, because their student loan burdens are so high. We want people to overcome the psychological barriers that keep them from achieving homeownership. Your student loan debt may seem insurmountable, but you can’t let it prevent you from living your life—getting into a home, even while you’re paying down student debt, can set you up for success later.
We recommend student loan counseling to find out if there are other repayment plans that could help you qualify for a mortgage more easily. It’s a good idea to get on a student loan repayment plan several months before applying for mortgage loans, so your credit report has time to reflect the new payment plan.
Other Barriers to Homeownership
Other barriers to homeownership should be heeded:
- Home values. If the market is out of hand in your area and homes are overpriced, then it’s probably a good idea to wait and keep shopping. Homeownership is about stability, so it shouldn’t be treated as an investment in the stock market. Don’t risk buying an over-priced property you can’t truly afford.
- Credit history. If your credit score is bad, and you’re facing much higher rates and monthly mortgage payments as a result, then it’s probably a good idea to wait and work on improving your credit, then re-apply after a few months and get a better rate. You’ll probably be paying your mortgage for 30 years, so the amount you will save in the long run by improving your credit first could be very significant.
- Career stability. If there’s a good chance you could lose your job soon, then it’s probably not a good time to get into a mortgage loan. You want to be reasonably confident you will have a paycheck that can allow you to make your mortgage payments for the foreseeable future.
While there may be good reasons for you to wait before entering homeownership, debt doesn’t have to be one of them. Credit and debt counseling can help you come up with a solution for your debt problems and a plan to systematically knock out your debt and save for your long-term goals.