Borrowers should carefully examine programs aimed at lessening their student loan debt to finance a home.
Evidence showing that student loan debt is affecting the housing market continues to pile up – but so are tangible solutions for borrowers.
According to the recent joint study by the National Association of Realtors and American Student Assistance – full disclosure, ASA authors the Student Loan Ranger – most millennials who carry student debt today do not own a home, and they typically expect to wait seven years to buy one, thanks to their student loans. Most cited the inability to save for a down payment as the cause for the delay.
Meanwhile, among millennials who do own homes, 28 percent say student debt is holding them back from selling their existing home and buying a new one. The average delay for homeowners to buy a new home, because of their student debt, is three years.
The study, which surveyed millennials born between 1980 and 1998, found a median debt load of $41,200 but a median annual income of only $38,800. And similar to the results of multiple other reports in recent years, this study showed that student debt delays borrowers’ other personal finance decisions, like starting a family or business or saving for retirement.
Now those directly affected by millennials’ slow entry into the housing market are starting to take notice.
Lennar Corp., a homebuilder based in Florida, and its subsidiary Eagle Home Mortgage recently unveiled its Student Loan Debt Mortgage Program to help free up student loan borrowers’ budgets so they can afford a home. Under the program, Lennar will direct up to 3 percent of the home purchase price to repay up to $13,000 of the borrower’s student loans for those purchasing a brand new home from the company.
Down payments can be as low as 3 percent, but potential buyers must meet credit and income requirements. The program aims to benefit millennials and is not intended for parents who borrowed for their children’s education.
Skeptics are wary that programs like Lennar’s will drive up home prices because the seller or lender will simply turn around and build the student debt contribution into the purchase price, although Lennar states in its announcement that those funds do not increase the home’s price or the mortgage loan amount.
Interested student loan borrowers should examine offers like these carefully to make sure a home’s price hasn’t been artificially inflated – you don’t want to just exchange student loan debt for home debt. But at the same time, this is a positive step forward that players not typically associated with student loan debt – like homebuilders – are developing creative fixes to ensure student loan borrowers can still purchase a home.
Homebuilders and lenders aren’t the only ones stepping up to the plate, either. As we noted recently, Fannie Mae and the Federal Housing Administration have made changes to the rules surrounding debt-to-income ratios that benefit student loan borrowers on income-driven repayment plans; borrowers who have their student loans paid by a third party, like their parents or employer; and borrowers who may want to pay off their education loans with home equity.
One state government has also gotten creative in this area. For the past year, the Maryland Department of Housing and Community Development has offered its SmartBuymortgage loans to help eliminate student loan debt as a barrier to home ownership.
Here’s how this initiative works: Maryland sells foreclosed homes, after it makes them move-in ready, to first-time homebuyers with student debt. The mortgage is structured into two.
The first mortgage covers 95 percent of the sale price, while the second is a five-year forgivable loan in the amount of up to 15 percent of the purchase price. The latter is used at closing to pay off the borrower’s outstanding student debt balance and is a zero-percent interest-deferred loan with no monthly payments.
Each year for the first five years of the mortgage term, 20 percent of the total amount due is forgiven. So the homebuyer never has to repay the second mortgage at all, unless he or she sells or refinances in the first five years.
Like the Lennar program, only student debt in the borrower’s name that was used for his or her own education is eligible. And one important caveat: Maryland will put up between $1,000 and 15 percent of the home purchase price to pay toward the borrower’s student debt – but if the borrower’s total student debt exceeds that 15 percent, he or she must make other arrangements to pay off the entire balance at the time of closing. The borrower can’t have any outstanding student loans after the home purchase is complete.
For prospective homebuyers who feel like their debt is holding them back, the good news is that programs like Maryland SmartBuy are drawing attention from other states anxious to replicate the win-win benefits, like attracting an educated workforce to put roots down in the community and bringing stability to neighborhoods decimated by the foreclosure crisis of the Great Recession.
Unfortunately, we still have a long way to go before programs like these are widespread and more student loan borrowers can enjoy the benefits. In the meantime, student loan borrowers should educate themselves on all the emerging options to mitigate their debt, such as employer student loan reimbursement and the mortgage underwriting rules changes mentioned above.
Original article found at: https://www.usnews.com/education/blogs/student-loan-ranger/articles/2017-10-11/new-homebuyer-programs-help-student-loan-borrowers
