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It’s not just rising prices and low inventory putting a squeeze on first-time home buyers. Many are coming into the market with an added hurdle: student debt.
While buying a home is often a significant way to build wealth, younger buyers with heavy debt burdens can be shut out of the market.
A report from the Federal Reserve published in 2019 found “a $1,000 increase in student loan debt...causes a 1 to 2 percentage point drop in the homeownership rate for student loan borrowers during their late 20s and early 30s.”
The same report estimated “roughly 20 percent of the decline in homeownership among young adults can be attributed to their increased student loan debts since 2005.”
These loans weigh on a buyer’s debt-to-income ratio, and affect the size of the loan they qualify for. Less buying power can be an obstacle as home sales prices continue to climb in the Charlotte metro area, where the median sales price surpassed $340,000 last month.
The average Charlottean with student loan debt had a balance of more than $37,000 last year, slightly more than state and national averages, according to an article by Lending Tree’s Student Loan Hero site. The data came from both anonymized credit reports and federal sources. The report found Mecklenburg residents pay around $310 on student loans monthly, on average.
‘Roadblock,’ but not impossible
Student debt can be a “roadblock” to home ownership for many, said James McDuffie, community lending manager for U.S. Bank’s Mid-Atlantic region.
“We’re seeing that a lot with this younger generation,” especially those under 30, he said. “They have a strong income, great job (and) plenty of savings, they just unfortunately have that debt.”
Student loans were definitely on the minds of Grant and McKenzie Toth before they closed on their first home in the Windsor Park neighborhood earlier this year.
Their debt didn’t keep them from getting a loan. The couple, who both work in health care, were buoyed by other positive factors, including strong credit scores, Grant said.
“Naturally, it is going to limit kind of your budget and what you can afford,” he said. ”My wife is a doctor and we’re going to be in debt for our whole life.”
He said they made sure to factor in their $1,200 to $1,500 monthly payments toward their combined student loans into their budget.
“Previous generations have never had those kinds of loans for schooling,” he said, calling it a significant consideration when putting in an offer and non-refundable due diligence payment.
“We really wanted this house,” he said. “We didn’t want to lose our due diligence because we were ill-informed and found out you can’t actually afford this because you’ve got too much debt.”
McDuffie said the college debt burden falls especially hard on Black borrowers, who leave school with larger loans than their white counterparts, esearch shows. Debt has also increased for Asian and Latino borrowers.
“They’re graduating with great grades, they’re getting great jobs and they want to buy a great house,” he said. “But when they come and talk to us, we are limited because of the hundreds of thousands worth of debt that they have.”
In June, the Biden administration announced that the Federal Housing Administration would change its loan calculations with respect to student loans. It will no longer use 1% of the borrower’s outstanding loan in its formula but rather the actual monthly payment.
Officials with the U.S. Department of Housing and Urban Development said the change will lower barriers to home ownership, particularly for minority buyers.
“Homeownership is the cornerstone of the American Dream and the best way to build generational wealth,” HUD Secretary Marcia Fudge said at the time. “This new policy will make a big difference for individuals throughout our nation and is another step in our mandate to promote equity and opportunity for homeownership.”