Pittsburgh Post-Gazette on August 21, 2012
by Tim Grant
College graduates typically earn more than non-college graduates during the course of their lifetimes, yet the average 30-year-old who left school with a bachelor’s degree in 2004 is most likely ineligible today for a home mortgage due to a high debt-to-income ratio.
“Denied? The Impact of Student Debt On the Ability to Buy a Home,” a report released by Young Invincibles, a Washington, D.C.-based organization, concludes that today’s college graduates are worse off financially than previous generations.
“Looking at a key factor in qualifying for a mortgage — the debt-to-income ratio — we find some disturbing results,” the report reads. “Debtors who graduated in 2004 and start looking for a mortgage to purchase a home [in 2013] — the average age for home purchase is 30 — will face some difficult realities.”
Based on economic data pulled from government sources, the authors estimate the typical 30-year-old college graduate looking to buy a home would need to spend about half of his or her monthly income on mortgage, student loan, credit card and car payments — making thatindividual unqualified for many home loans, including mortgages offered by the Federal Housing Administration, which have lower requirements.
Couples face possible rejection qualifying for a mortgage if even one of them has student debt, but especially if both buyers have student debt.
“The report takes the first bite at the apple to show how rising student debt may lead to significant economic impacts,” said Rory O’Sullivan, policy director at Young Invincibles. “As education debt grows, it pushes more borrowers out of the housing market, potentially adding another drag to an economy only just emerging from the Great Recession.”
Mortgage lenders want to make sure that borrowers don’t already have huge debt burdens relative to their income, so they use debt-to-income ratio to determine who qualifies for a home loan.
For example, a couple who earns $3,000 per month but spends $850 a month on a mortgage, $50 on credit cards and $300 a month on student debt (($850 + $350) / $3,000) would have a debt-to-income ratio of 40 percent. They would barely meet FHA requirements that cap total debt payments at 41 percent of income and they would not meet many conventional lender requirements, which are usually higher.
The Young Invincibles report does not factor in other important considerations that affect homebuyers, such as credit score or downpayment.
Some of the government data that researchers used to make their estimates came from the Boston Federal Reserve’s 2009 Survey of Consumer Payment Choice, the 2010 Consumer Expenditure Survey, the 2009 American Housing Survey, the 2011 Current Population Survey Social and Economic Supplement and the 2003-04 National Postsecondary Student Aid Survey.
In a separate online survey that Young Invincibles conducted in January, one respondent lamented, “They now consider my loans in my debt-to-income ratio and I can’t get a loan to buy a home even though a mortgage payment would be less than my rent.”
Another survey respondent told the organization, “I dread that I will probably never own a home, can’t pay for a car or buy an engagement ring for the one I love.”
This year, total student debt in the U.S. hit $1 trillion. An estimated two-thirds of the Class of 2010 are saddled with an average burden of $25,250, according to the Project on Student Debt at the Institute for College Access & Success.
Graduates of Pennsylvania colleges and universities carry an average student debt of $28,599, and researchers at the project on Student Debt found that about 70 percent of graduates in this state have student loans.
Such loans fall into a different category than most other forms of debt, since student debt cannot be discharged in bankruptcy.
Young Invincibles was founded in the summer of 2009 by a group of law students at Georgetown University Law Center who saw a need to advocate for issues affecting young Americans, such as the availability of health insurance, high youth unemployment and high student debt.
Tim Grant: tgrant@post-gazette.com or 412-263-1591