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Research conducted by the Federal Reserve shows that rising rates of student loan debt in the United States have reached alarming levels. This has become a national epidemic with far-reaching influences on the long-term financial well-being of people across the country. More than 44 million Americans carry a collective student debt load of almost $1.5 trillion, and women shoulder nearly two-thirds of this burden.
Unfortunately, this isn’t simply an academic or abstract concept, as the data suggests that these trends are preventing younger generations from achieving the important goal of home ownership. The negative effects of student loan debt impact one in every four Americans, so it’s important for young adults to establish strategies to structure debt/income relationships and limit the long-term consequences of compounding interest.
Debt Strategies to Achieve Home Ownership
The first step is to know that a suitable credit profile is an absolute requirement for anyone hoping to obtain mortgage loan acceptance from a bank or other lending institution. In 2014, the Federal Reserve found that only 36% of all U.S. adults in the 24-32 demographic were able to purchase a home, and most application rejections came as the result of a poorly structured credit profile. This indicates a significant drop of 9% relative to the official data figures from 2005, and this decline doubled that of all other age demographics during this period.
Recent statistics suggest that a student debt level increase of $1,000 leads to a 1-2% decline in the rate of homeownership for borrowers in their late 20s to early 30s. Essentially, these trends have caused a 20% decrease in the long-term rate of home ownership in America. Approximately 400,000 people in the younger age demographics would have been able to afford to purchase a new home had it not been for the dramatic increases in student loan debt over the last decade.
To overcome these unfortunate outcomes, people need to understand the negative impact that excessive debt can have on future borrowing ability. Buying a house involves much more than simply coming up with the down payment. Higher odds of mortgage acceptance come with improved debt profiles and diligent monitoring of all available credit scores.
When looking for ways to make your mortgage application more attractive to potential home lenders, consider the following.
1. Make sure all student loan payments are sent on time
Early planning efforts must stress the importance of making all student loan payments on time. If lenders see a long history of missed payments, they’ll be more reluctant to take a chance on your mortgage application. Late or missed payments are going to ding your credit score as well, so it’s a two-fold effect.
2. Lower your interest rate and monthly payments by refinancing loans
Refinancing student loans to secure a lower interest rate can make this easier to accomplish. As an added benefit, it can also substantially reduce your monthly loan payments. The goal is to ensure that a large portion of what you pay each month is actually going toward the loan principal and not merely being spent to stave off interest.
3. Improve your debt-to-income ratio over time
Consistent improvements in your debt-to-income ratio can make your applicant profile more attractive relative to other potential borrowers. As your debt decreases, your DTI should incrementally improve, but you can further your efforts by taking on a part-time job or a side hustle.
DTI essentially measures the amount of money you make and compares that number with the amount of money you owe on various expenditures each month. The maximum DTI threshold required for loan approval will vary depending upon the criteria established by your mortgage lender, but most will typically be between 40% and 50%. It’s helpful to know where you fall in line on this spectrum, and you can find your number using a debt-to-income ratio calculator.
Total income levels make up a critical component when potential mortgage lenders are assessing your loan qualifications. However, it’s also important to keep your total student debt levels to a minimum until you graduate. When lenders see this type of fiscal discipline, there’s a much better chance they’ll accept your application and set you on the path to home ownership. Long-term trends in student debt accumulation have reached worrisome levels, and these trends have created financial obstacles for a significant percentage of the country. Fortunately, proper financial planning can help mitigate many of these negative influences, and implementing these three strategies can increase your chances for loan approval.