Clients need to understand their employment history is a piece of the mortgage application puzzle.
It’s no secret that many Americans are financially burdened by their student loan debt.
Between rising tuition rates, sky-high home prices, rising interest rates, and diminished inventory, no wonder more than half of those with student loan debt report it impacting their life decisions.
It’s estimated that 43.4 million people have outstanding student loan debt today, with $28,950 owed per borrower, on average. The reality is, with median household income in the U.S. hovering around $67,000, concerns around debt-to-income (DTI) ratios, credit scores, and otherwise qualifying for a mortgage loan with student loan debt plaguing many of these would-be buyers.
Currently, student loan debt primarily affects millennial borrowers. According to the National Association of REALTORSⓇ, a staggering “ 60% of non-homeowning millennials say student loan debt is delaying their ability to buy a home, by far the most affected population”. Millennials also happen to be the most prominent demographic in today’s housing market, making up nearly half of all homeseekers.
The unfortunate reality is that outstanding debt is holding many of these would-be buyers back. But it doesn’t have to be this way. Potential buyers with student loans may have options and, in many cases, simply need a dedicated and empathetic MLO to lead the way.
Education around student loans and homeownership
One of the primary roadblocks for potential borrowers with student loan debt is a misunderstanding of the DTI ratio. Many of these individuals may believe that having debt of any amount automatically disqualifies them from home financing. If this is the case, explaining the concept of DTI thoroughly is critical and ensuring the client understands how DTI is calculated with respect to student loans.
Be sure to clarify that changing your DTI ratio may be as simple as decreasing debt or increasing income. Explain that borrowers could work to pay down other debts or maybe even take on a side hustle if they’re especially eager to make homeownership a reality.
While you’re at it, you may want to dispel the myth that a 20% down payment is always required. More than 60% of Americans still believe that this is a necessity when it comes to buying a home, another factor that is likely scaring off those with student loan debt.
Finally, walk these clients through the various loan options that might apply to their situation.
Loan options for borrowers with student loans
Conventional loan: If the buyer has a DTI below 50%, you may want to walk them through a conventional loan. Explain that the government does not back these loans, so they’ll need to meet the requirements laid out by Fannie Mae and Freddie Mac. If you have branded literature outlining these requirements, even better!
FHA loan: If their DTI is up to 57%, they may still qualify for an FHA loan. You may want to educate potential borrowers on how these loans are backed by the government through the Federal Housing Administration, so lenders may be more easily able to work with borrowers like themselves.
VA loan: Of course, the VA loan is one of the most powerful homeownership tools on the market. If clients are eligible, they could potentially secure a loan with 0% down or a DTI up to 60%. While it isn’t an option for everyone, former servicemen and women or their eligible spouse with student loan debt could be that much closer to homeownership.
Helping millennials navigate student loan-friendly options
Unfortunately, student loan debt is driving the lives of millions of Americans. From dictating career paths to delaying homeownership, the effects are severe and far-reaching.
As an MLO, though, you’re in a powerful position to help. Make a point to prioritize education, informing those clients with debt exactly how it might affect them. Approach their home search with empathy and thoughtfulness, and you just might secure a client for life.
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