The Impact of Student Loans on Mortgage Applications

by James McClister

Millennials are waiting longer and longer to move into homeownership, but do student loans mean getting approved for a loan is harder?

It’s no industry secret that Millennials are staying away from the homebuying process, in large part to crushing student debt, tight lending standards and low – or no – credit scores, but what about the young, ambitious college grads who want to get into the real estate game early?

A recent article from The Wall Street Journal, citing numbers from top 30 mortgage lender LoanDepot.com, tackled this question and found that, surprisingly, loan applicants with student loans are not being turned away more often than applicants with debt. However, with that being said, fluctuations in the size of monthly debt obligations can be the determining factor in whether applications get approved or not.

Debt Obligations Don’t Mean Loan Denial

According to data from LoanDepot, of the nearly 46,000 loan applications for first-time home purchases the firm processed over the last four years, more than 75 percent were approved and funded. WSJ points out that the data obviously ignores the number of potential borrowers who choose to defer payments because of student loans, but the number is impressive nonetheless.

Of the approved loan applicants who began the process with lingering student debt, the ratio of approved to denied, regardless of overall debt burden, was split nearly down the middle – 27.3 percent of approved borrowers with student debt were approved and 26 percent with student debt were denied.

What a Difference a Few Hundred Dollars Can Make

The primary metric used to establish a borrowers’ ability to repay loans, the WSJ article states, is the applicant’s debt-to-income ratio, which is the percentage of the payer’s gross monthly income that goes to paying off said debt.

Anthony Hsieh, the chief executive of Loan Depot, told WSJ that between approvals and denials, the borrower’s credit tends to be the same.

“The fundamental difference is a few hundred dollars in student loan debt that pushes the debt-to-income above the approved threshold,” he said.

Since the beginning of 2014, approved applicants who also carry student debt had average monthly debt payments of $300, while those denied were lassoed with payments of nearly $500.

John Burns Real Estate Consulting Principal Mollie Carmichael warns in the article that these trends are a direct result of young adults signing up for student loans and not understanding what paying them back will really entail. She said that she hears from Millennials constantly, and many say that didn’t fully comprehend what they were getting themselves into when they signed the applications.

The path to homeownership for Millennials, as the market stands, is a considerable challenge, but Hsieh believes that if the mortgage industry develops more flexible underwriting guidelines, lenders would then be able to take into account student loan debt and forge a much more accessible path to mortgage approval for young buyers.

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