Buying a Home with Student Loan Debt

Student loan debt is frustrating. The average student debt is somewhere near $30,000. Making your monthly payments on a $30,000 student loan can be really brutal. Especially when you're young and struggling like most of us millennials. The really scary figure is that there is over $1.2 trillion dollars in outstanding student debt. It's incredible that there is such a massive unsatisfied debt for something as basic as education. I definitely fear that the US economy is going to somehow be directed impacted by these loans. It is already problematic that young people can't contribute much to the overall economy because 1/4 (or more) of their paychecks go towards debt service. Hopefully, we can find some kind of resolve for these outstanding balances so that out nation's young adults can begin contributing fully to their economy. On top of these pestering student loans, young people also have to contend with rising rents. Rents have been skyrocketing for the last few years and they are expected to continue to rise another 8% through 2016.

This affects young people more than most. It is no surprise that many young people are still floundering to some degree. Whether they be unsure of what they want to do or if they are struggling to get their passion positions to pay them well, most young people are not rich. This is an historic fact. Young people usually do not have much in the way of assets and funds. That isn't just millennials. That's essentially every generation in their early adulthood. Hence, most young people that don't boomerang end up paying rent. One thing about millennials is that they are also considered urbanites, so they prefer to live near city centers, which is generally more expensive. Over the last few years, rents have been increasing at such an aggressive rate that many young people are being pushed out of their already gentrifying neighborhoods. 

These two major reasons (plus a scarcity of competitive employment) are what will affect young people the most when it comes to purchasing a home. I know a ton of people who would love to be able to buy a home in the immediate future. For the most part, they are unable to due to lack of funds or a high debt ration. I also know a ton of people who are able to pull it off because their expectations are realistic (and I often help them find homes to buy). CNN Money wrote a great article recently titled, "Should I Buy a Home while Still Paying Student Loans" by Kathryn Vasel. The article discusses some of the numbers and ratios involved in buying a new home. One large misconception is that you need to put down 20% or even 10%. That is not true. You can put down as little as 3.5%, but if you pay less than 20%, you will almost definitely have to pay PMI, which could be $100-$200 per month. PMI is just a safety precaution that lenders require you pay when you do not have the funds to put down a large down payment. Another very important number in this discussion is DTI (debt-to-income). DTI is an equation of your total income and debts per month. This equation will determine how much money you are capable of paying towards a mortgage each month. The issue here is that those with student loans already have a huge obligation on their books, which makes affording a mortgage incredibly difficult. The nice thing about renting is that they will not likely analyze your DTI in the leasing office. The terrible thing about renting is how rents are going to continue to rise and effectively phase out millennials. You would be surprised how many young people I work with who are interested in buying and later find that they will actually be paying the same or sell for a mortgage. Of course, mortgages are usually a fixed-rate and are not to rise in the same way as rents. 

So, should you buy a home with student loan debt? In my opinion, yes. As long as you can afford it, it is probably going to be a better move in the long run. The beautiful thing about working about with a mortgage lender is that they can analyze your finances and see what you can be approved for before you ever even go look at any homes. If you can not afford a home right now, just wait until you can (the lender won't charge you anything for a preapproval). But, I assure you that rents are outrunning inflation and there will be a big crunch in that industry soon. You can buy a home with a very low downpayment and moderate credit. Plus, interest rates are in the 3s and low 4s right now! That is awesome! You will find yourself in a better position if you buy now and watch rents from your front porch. The downside to purchasing a home is that you are responsible for the taxes and insurance, but luckily, that is included in your monthly obligation. The other thing to remember about purchasing is that you are responsible for the repairs and maintenance, so keep a fund for emergency repairs and maintenance. However, I still think that you would do better to pay a mortgage+repairs than to rent for the next 10 years.

The other huge issue here is that millennials like to be in city centers, as I said earlier. If course, living closer to town means paying far more money as home prices are quite a bit higher. What this means for millennials is that we will absolutely have to consider living farther away from town that we may like. Generally, the farther away you go from town, the lower the prices of homes. One saving grace in this scenario is that most millennials are used to smaller spaces and would do better than most in a home with lower square footage. One of the difficult things in this scenario is that many young people nowadays do not own cars, but rely on public transit and bikes to get to work or social affairs. In this instance, those individuals will have a hard time unless their town offers very reliable public transport. 

At the end of the day, I do think it's a precautionary measure to go ahead and buy if you can. If you rent, you WILL see your rent continue to increase. It may even increase at the end of each and every lease term. You would be surprised to see how much your monthly mortgage payment (plus taxes and insurance) would be on a reasonably priced home. In fact, my girlfriend and I are in the market for a new primary residence at the moment. We have been living in a house that I intended to be a rental when we get to move on. When I got my taxes back, I decided it was time to find something that we will stay in for a few years. At that time, I would like to keep that property as a rental, if we do not have to sell it. We made the mistake of going to an open house over the weekend that was out of our price range. We then found something in our price range that is very sensible and has some surprising amenities for the area. All in all, our monthly obligation is right around $1,000 for a 3 bedroom, 2 bath home. It's 1,400 sq feet and has a fenced in yard. It's in a gated community with a pool and walking/jogging trails. It's about 20 minutes from downtown and maybe 30 to the beaches. We still haven't gotten a response from the seller yet, but I anticipate our offer to be accepted. Hopefully, we can stay there for 4-5 years and upgrade from there. Buying a home is one of the fastest ways to utilize your own finances to start building wealth. You will not longer be leasing someone else asset at your own detriment. You will begin using your own qualifications to purchase your own asset and your payments will go towards building your own wealth and not someone else's.

If you have any question about buying or selling a home, please let me know! And if you or anyone you know needs a Realtor, I'd be happy to help. I also wrote an eBook about the process of buying a home. I would be happy to send you a free copy if you would like to learn a bit more about the process before taking action.

Thanks again,

Troy Franklin Gandee