Can student debt relief help you buy a house? Experts weigh
Could Biden’s Debt Relief Plan Help Homebuyers?
Student loan debt can be a huge burden for homebuyers, delaying their plans and even forcing some to postpone homeownership altogether. But the Biden administration’s student loan forgiveness may offer some relief from rising housing costs.
Reducing – and perhaps erasing – the debt burden through this subsidy program will improve debt-to-income ratios for many borrowers. This could help turn more renters into owners in the years to come.
Borrowers can now apply for student debt relief
On October 17, the White House officially released The app for President Biden’s student loan forgiveness program.
Politics – first announced in August — is a three-pronged plan that can forgive up to $20,000 in student loan debt for low- to middle-income borrowers. To qualify, your annual income in 2020 and 2021 must be less than $125,000 as an individual or less than $250,000 as a family. Applications will be open until December 31, 2023.
How Student Debt Affects Buying a Home
A key metric that lenders use to determine if a borrower qualifies for a loan is the debt-to-income ratio (DTI). DTI compares your monthly debt payments to your gross monthly income and shows if you can afford to make your mortgage payments.
Since the DTI calculates your monthly finance charge, it also gives you an idea of how much house you can afford. Although several factors determine mortgage eligibility, lenders have set DTI limits for borrowers. These ratio limits vary by loan type:
- Conventional loan: up to 43% generally authorized (36% is ideal)
- FHA loan: 43% generally allowed (50% is possible)
- USDA loan: 41% is typical for most lenders
- VA loan: 41% is typical for most lenders
Student loan debt caused 51% of all borrowers to postpone or delay buying a home in 2021, according to a National Association of Realtors investigation. Additionally, about 25% of all recent buyers and 37% of new buyers had student loan debt, averaging $30,000.
If you feel like debt is holding you back from home ownership, could Biden’s student loan relief plan make a difference?
Will student debt relief make a dent? What the experts think
The Biden administration’s program is expected to provide financial relief to millions of student debtors. Many then wonder what the quantitative effect of debt reduction will be on the purchase of a home.
“It could [have a bigger impact] in a year or more when households have been able to advance their home buying schedule with less outstanding debt.
–Taylor Marr, Deputy Chief Economist at Redfin
We asked a trio of housing industry experts for their thoughts on the matter. While certainly useful for those seeking debt relief, the impact on the real estate market could be minimal. Here’s what they had to say:
Odeta KushiDeputy Chief Economist at First American
“According to the White House, the plan will provide relief to up to 43 million borrowers, including writing off the remaining balance for approximately 20 million borrowers.
For potential homebuyers who are on the fringe, debt relief could allow them to use money that was going to student loan debt to save for a down payment. It may also offset some of the affordability loss due to rising mortgage rates, as what was once a student loan payment may become part of a mortgage payment.
Taylor MarrDeputy Chief Economist at Redfin
“I don’t think the cancellation of student loans will have much impact on buying a house. Buyers have already had their payments frozen for some time now and they have been able to either pay off loans or build up savings.
Lenders were also able to make adjustments in the handling of student loans for borrowers before this plan was put in place, which means the net benefit will likely be quite small. This may, however, have a slightly greater impact in a year or more when households have been able to advance their home buying schedule with less outstanding debt.
Rick ShargaEVP of Business Intelligence at Atom Data Solutions
“While the Student Loan Forgiveness Act may help a few people transition from renter to buyer, it is unlikely to happen in large numbers. For borrowers whose debt will be largely wiped out, they likely could have qualified for a mortgage even with that debt.
For borrowers with six-figure student loan debt, the $10,000 forgiveness probably won’t be enough to move the needle. Debt forgiveness could remove a psychological barrier for some borrowers who were torn between trying to buy a home and paying off more of their student loan. But again, I doubt the number of people this influences will have a significant effect on overall home sales.
Student Loans Shouldn’t Stop You From Buying a Home
If you don’t qualify for the federal student debt relief program or if it has only minimal impact, you can still get a mortgage and buy property.
Lenders have flexibility in their underwriting. They may forgive student loan repayments, especially if other aspects of your loan application, such as your credit score and down payment, are strong. Lenders can even reduce the amount of student debt they consider if you’re in a deferred payment plan or an income-based repayment plan.
“You absolutely can buy a house with student loan debt,” mortgage expert Ivan Simental said on an episode of The Mortgage Reports podcast. Simental advises potential homebuyers with student loan debt to reduce their DTI by paying off smaller loans, keep their card balances low, and boost their credit rating as much as possible.
You can learn more about how to buy a house with student loan debt here.
The bottom line
Only time will tell how student debt relief will help homebuyers. The impact may be minimal since buying a home and paying off your college loans are not mutually exclusive.
If you want to buy a home but aren’t sure if you qualify because of student debt, talk to a lender. Even if your ratio is above the usual limit, there may be exceptions or another type of mortgage that suits you better.
The information contained on The Mortgage Reports website is provided for informational purposes only and does not constitute advertising for products offered by Full Beaker. The views and opinions expressed herein are those of the author and do not reflect the policy or position of Full Beaker, its officers, parent company or affiliates.