Is student debt locking out homebuyers?

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The rise in student loan debt in recent years has raised concerns that college graduates are being squeezed out of the housing market. But a new report may debunk the myth of student debt weighing on potential homebuyers.

Young interracial couple talking with older couple (parents?) outside a house on a sunny day.Seven in 10 college seniors who graduated in 2014 had student loan debt, with an average of $28,950 per borrower. Over the last decade, the share of graduates with debt rose modestly, from 65% to 69%, while average debt at graduation rose at more than twice the rate of inflation, according to the Institute for College Access & Success’s Project on Student Debt.

A new analysis from Brookings Institution Senior Fellow Susan Dynarski concludes that all that debt is not sinking college grads’ homeownership opportunities.

The typical undergraduate borrower with a BA has a debt of $30,000 and owes $350 a month, or just $4,200 a year,” she writes in in the report. This burden of student debt is dwarfed by the differences in earnings between those with and without a college education.

“Those who borrow for college do have a slower start to homeownership than those who went to college debt-free,” Dynarski wrote. “But by the time people are in their thirties, when the typical borrower would have finished paying off her student loans, the home ownership rates of the two college-educated groups are statistically indistinguishable.”

The bottom line from this analysis is student debt is generally not locking people out of homeownership. College grads are more likely than non-college grads to become homeowners – even with student loan debt. So if you have student debt, don’t despair; odds are in your favor when it comes to homeownership.

That said, important factors to consider on the road to homeownership are your income and your debts – whether from student loans or any other type of debt.

More debt generally means more of your income may have to go to monthly payments, leaving less for saving for a down payment. More debt also means you likely have less of your income that is available for a monthly mortgage payment. The higher your debt-to-income (DTI) ratio, the less you may qualify for when seeking a mortgage.

If you are thinking of buying a home and you have student debt, here are a few tips:

  1. Stay current on your student loan payments. One of the top factors that hurt credit scores is late payments.
  2. Learn your debt-to-income ratio, which compares all your income to your total monthly debt payments to determine if you’re living within your means. As a general rule, it is prudent to keep your DTI below 43%, which means $43 of every $100 a person earns is going to debt payments.
  3. If you feel you’re ready to house hunt, get preapproved for a mortgage from lender. A preapproval gives you a good sense of what you can afford based on your income, debts, and savings available for a down payment.
  4. Finally, if you’re looking for helpful tips on managing student debt, take a look at The Institute for College Access & Success’s site for these top 10 student loan tips for recent graduates.

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