Homeownership: Can you do it with student loan debt?

Only a couple of years ago economists expressed concern that Millennials were still not buying their first homes at the traditional age their parents did. Multigenerational households came back in vogue during the Recession; other Millennials rented with cohorts. But post-Recession they still weren't buying their own homes. Without the younger generation's participation, could the housing market fully recover?

Then, in 2014 and throughout 2015, young, first-time home buyers began entering the market. With rents rapidly on the rise, mortgage rates still extremely attractive, and jobs more plentiful, about 2 percent of Millennials, according to chief economist of realtor.com, Jonathan Smoke, have finally seized the opportunity to become homeowners.

Especially if you have been living with your parents or renting with several roommates since graduation, you may seriously yearn to join the ranks of homeowners. But you've amassed a pile of student loan debt; won't it stand in the way of your buying a home? Maybe not.

The question analysts as well as many Millennials are asking now is, Will young, aspiring homeowners have the buying power they need to sustain the housing market, or will the $1.2 trillion in aggregate student loan debt as of Q4 2014 pose an insurmountable obstacle to homeownership for them?

Student loan debt and homeownership: When is it a problem?

Freddie Mac's September 2015 Insight and Outlook examines the currently common assumption that student loan debt is and will continue to be a major stumbling block to homeownership for young people, and it has a lot to do with the Recession. Homeownership for 27- to 30-year-olds with student loan debt, which prior to the Recession was 2 to 3 percent higher than for non-borrowers, did indeed decline during the Recession to 1 percent lower than for those who had no outstanding student loans. But what exactly is the relationship between student loan debt and homeownership?

• For many young people, the Recession and post-Recession economy actually became an incentive to attend college, both 2- and 4-year programs, as well as graduate school, due to the lack of suitable employment opportunities at the time.
• Attending graduate school temporarily deferred repayment of existing student loans, but typically augmented student loan debt, increasing the burden of repayment, which in theory would not be problematic with better employment prospects.
• However, not all students completed their studies. If you accumulated student loan debt but never secured the degree you studied for, you still have to pay the loans off, and that seems to be the real issue regarding student loan debt and homeownership.

Over 50 percent of students who borrowed money for their education owed more than $10,000 at the end of 2014, according to the Freddie Mac report. Almost 2 million of them owed more than $100,000.

Research done by Zillow, however, indicates that students who earned their degrees -- typically the ones with the most debt -- actually have the best chance at homeownership because their incomes make it easier for them to repay their loans. Their research concludes that holding a bachelor's degree or higher can improve your chance of homeownership even if you have significant student loan debt. On the other hand, an associate degree or no degree with student loan debt reduces homeownership probability more significantly than it does for graduates with large debt loads.

As Zillow's chief economist, Svenja Gudell, explained, "Certainly, it's better to accumulate debt and finish your degree than it is to accumulate debt but have nothing to show for it in the end."

Sean Beckett, chief economist for Freddie Mac put it this way: "Students who attended schools with less-certain educational benefits have not fared well. Borrowers who did not complete their studies have fared worst of all. These groups are likely to continue to affect the pattern of homeownership among Millennials."

In other words, if you're still in school, get your degree. When it comes down to qualifying for a mortgage, it's going to be your ability to repay it that counts most, and that does take into consideration your debt-to-income ratio (DTI).

If you want to buy a home and have student loan debt

Smoke, who analyzed which prospective homebuyers are having the most difficult time qualifying for a mortgage, found that 52 percent of them couldn't come up with a downpayment and 60 percent needed to improve their credit scores. Besides finishing school, here are some tips to help you achieve your goal of homeownership if you have student loan debt:

1. DTI. Your total debt load -- student loans, credit cards, and housing debt (mortgage) -- should be less than 38 percent of your gross income to qualify for a mortgage. If yours is higher, plan and execute a strategy for paying down your debt.
2. Downpayment. Saving for a downpayment can be tough when you're struggling to pay down debt. Seek out a housing counselor through HUD.gov who can help you find local programs that help homebuyers with the downpayment. Freddie Mac offers its Home Possible Advantage (SM) Program that allows you to put as little as 3 percent down.
   
3. FICO scores. Lenders look at your credit scores because they show how dependable you are at paying your debts. At-risk borrowers, those with low credit scores because of poor loan and credit card repayment history -- for example, defaulting on student loans -- have a tough time getting a mortgage. If no or very little credit history is the problem, you may be able to show your lender you are a good credit risk by producing other payment history such as rent receipts.
   

Today, getting an education costs a lot and not many young people can do it without loans. Nevertheless, your ability to afford homeownership, not just in the near future but for the rest of your life, may depend on you receiving your degree. After that, buying your first home can be the next best investment.