Friday, May 2, 2014
The following is an interesting article from First Tuesday relating to the troubles of the First Time home Buyer with Student Loans and other debt affecting their qualification for a home loan to complete the American Dream ... As the average age of first-time home buyers continues to rise in California, you may be wondering two things: why; and how long will this delay persist? To address the first question, does the delay have to do with Generation Y’s (those born in the 1980s and 1990s) different views on homeownership? Or is this extended adolescence a symptom of today’s agonizingly slow jobs recovery? This dynamic actually all began several years ago, when a generation of young, blossoming students were accepted into college and optimistically signed their student loan promissory notes — and the next decade or two of their lives away. Student debt reached a new high in 2013, surpassing over a trillion dollars owed in the U.S. alone. This is three times the collective amount owed just ten years ago. Further, student debt now exceeds credit card and auto debt. The average student graduated in 2013 with around $30,000 in student loan debt to repay, with most graduates on ten-year repayment plans. Why does this matter to real estate agents? A homebuyer needs some form of down payment and an acceptable debt-to-income (DTI) ratio in order to qualify for a mortgage. Being on the hook for student debt hinders both of these requirements. Take for example an individual who currently rents, but would like to become a first-time homeowner. They have pre-established monthly debt payments of: student loan payments totaling $600; a $300 car payment; and $100 in other debt. This makes a total of $1,000 in established monthly debt. If their monthly income is $5,000 (a generous estimate for a recent graduate), their current DTI ratio is 20%. Despite their burdensome debt load, say this individual is able to save for a down payment and apply for a Federal Housing Administration (FHA) loan requiring a minimum 3.5% down payment. At their stated DTI, this sample first-time buyer can qualify for a monthly housing payment (including mortgage insurance premiums and homeowner’s insurance) of $1,150, if they stretch their DTI to the maximum-allowed 43%. In this situation, the potential first-time homebuyer qualifies for an FHA loan of just under $180,000. However, home prices are well beyond this amount in most of California (particularly following 2013’s speculator frenzy and ensuing home price bubble). So this renter’s options are as follows: buy a tiny condo in an undesirable location today; or wait approximately 10 years for their student loan debt to be paid off so they can purchase the home they desire near their employment. How long is this first-time homebuyer drought likely to last? Federal student loans generally take approximately ten years to pay off, though they can be deferred even longer. However, student loan debt continues to rise each year as both college tuition and the percentage of those attending college increases. Thus, the first-time homebuyer of the future will have a little more gray in their hair and a little less money in their savings accounts before they take the plunge (if they ever do at all). Agents and brokers can prepare accordingly by adjusting their FARM strategies for the long-term. Think of planting today’s seed for tomorrow’s harvest. After all, those who are renting today’s will eventually have the financial capacity to become tomorrow’s homebuyers, though that tomorrow may be further off than previously thought.