Making student debt fit in the mortgage equation
I saw two interesting statistics recently: 46% of millennials are concerned they have too much debt. Meanwhile, a summer survey by Zillow found that 26% of millennials expect to buy a home within the next 12 months.
I’m glad one in four millennials is eager to buy a home. The debt burden figure, however, might make some millennials wonder if they can afford to buy. The data on debt comes from a FINRA Investor Education Foundation survey of various age groups that also found the following regarding millennials:
- 36% have student loan debt
- 28% have auto loans
Student loans and auto loans come up again and again in discussions about millennials’ debt obligations. Plenty has been written, including by the New York Fed, on whether or not student debt is holding people back from buying homes. But just because someone has student loans or a car payment doesn’t mean they can’t potentially buy a home.
You don’t have to be debt-free to be able to purchase a home.
I encourage people interested in owning a home someday to first gain an understanding of how much how much house they can afford. As a general guide, you can do this by subtracting your monthly debt payments from your monthly income, and based on what’s left over you can get a rough idea of what size mortgage you may be able to afford.
One good place to get an idea of what size mortgage you might be able to afford is with an online mortgage calculator. Here you can type in your income and monthly payments and see what size mortgage loan might fit with your financial situation. The calculation does not factor in added costs of homeownership such as property taxes and maintenance expenses, and, of course, a possible loan amount will vary based on interest rates, the length of a mortgage, and the down payment amount.
As general guidance, it is wise to keep your debt-to-income ratio below 43%. The federal Consumer Financial Protection Bureau (CFPB) has stated that studies of mortgage loans suggest borrowers with a higher debt-to-income ratio are more likely to run into trouble making monthly payments.
Once you have an idea of the size of home you may be able to afford, then you can work on trying to change the variables — such as increasing your income or reducing your debt — to align your financial picture with your dreams.