Can't Get a Mortgage? Blame Your Student Loans

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For saleWith the cost of a college education high and rising, more students are putting themselves deeper into debt than ever. But those huge debt loads don't just pressure students to find high-paying jobs after they graduate: They're also making it nearly impossible for some to get the financing they need to buy a home.

Ever since the financial crisis, banks have been a lot more careful about giving out mortgage loans. Having been burned by their low standards during the housing boom, banks are now doing everything possible to avoid a repeat of those massive losses. Moreover, having just entered into a $25 billion settlement with state and federal government officials over their foreclosure practices, banks are eager to steer clear of situations in which they might need to repossess a home.

For young borrowers seeking to buy a house for the first time, the tighter credit standards that banks are now using have made it extremely difficult to get a mortgage. When you add in existing student loan debt that can range well into six figures, the prospects get even worse.

No, You Still Don't Qualify

Even graduates who succeed in landing lucrative jobs can find themselves unable to get mortgage loans.

The lack of credit history combined with reluctance on banks' part to trust a short employment record in a spotty economy hits first-time homebuyers especially hard.

According to the Federal Reserve, among those ages 29 to 34, only 9% got a first-time mortgage over the past three years, compared to nearly twice that figure a decade ago. With student loan debt near the $1 trillion mark, the problem isn't going to go away anytime soon.

It's the Debt That Doesn't Die

Student loan debt payments can easily eat up a large fraction of your paycheck. But those loans scare banks even more because they're one of the toughest forms of debt for borrowers to get rid of. Even in a bankruptcy filing, student loan debt doesn't get forgiven unless it puts what bankruptcy laws call an "undue hardship" on the borrower.

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Given how hard it is to prove an undue hardship, student loan debt usually sticks around. Although banks making mortgage loans get priority to repossess a home, the complications of having high student loan debt involved make an already difficult process even more complicated.

The irony here is that first-time homebuyers could actually help the banks recover from the housing bust -- if they could only get mortgage financing.

In addition to helping eliminate the huge backlog of inventory at the lower end of the housing market, more buying from first-time homebuyers would also free up homeowners who've been stuck in entry-level homes to move higher up the price spectrum. That would create a cascade effect that could potentially make the overall housing market a lot healthier.

What to Do If You Have Heavy Student Loan Debt

Until conditions get better, you'll have to take steps of your own to improve your chances of getting a mortgage if you have a lot of student loan debt.
  • Start saving now for your down payment. Most first-time homebuyers try to pay as little as possible upfront when they buy a house in order to save cash for other purposes. But small down payments make banks nervous. Having a larger down payment not only puts lenders in a safer position but also demonstrates your money sense.
  • Shop around. Just because some lenders don't want to deal with you doesn't mean you won't have success anywhere. If big national banks won't lend to you, check out smaller local banks or credit unions. You may get a completely different reception there.
  • Do what you can to pay down your student loans. Establishing a solid credit history through your student loan debt is extremely valuable when you make your case with a mortgage lender.
Getting a mortgage is tough right now. But with these simple steps, you can boost your chances of being able to turn your American Dream into reality.

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July 16 2013 at 12:12 PM Report abuse rate up rate down Reply
como

People forget that "state schools" cater to the traditional students because they are the ones who are for the most part depending on their parent's income. Well, I had to work FULL TIME and take care of my son. I also had to rely on public transportation which is HORRIBLE in FL[I dont want to hear any different]I have relied HEAVILY on it and I know how it works! I would get up at 5am to get my son ready for care, and then have to catch THREE buses to make my 8AM calc class!

After struggling with this I finally realized that if I wanted to graduate from a state school it would take me an additional 3 years MORE than the "typical" 4year plan. So lets say at state schools tuition is 8k per year,32k=4years thats fine but if you are a WORKING student that can exceed and go into 56k and that doesnt even get into grad level costs. Most "working" students can only go part time if they want to graduate with good grades.

I HATE when some people want to generalize the responsibility of students. I do not have great credit BUT that doesnt mean I do not check it and try to fix it. I check my FICO almost every other day "religiously"...so whoever made the comment about students going to private schools not managing their funds dont get out much. Yes A LOT of students are irresponsible BUT CLEARLY older adults are too. Those "older" investment bankers were not and are not so bright are they? I think Jamie Dimon summed my thoughts on that fairly easily. EVEN congress, while us "middle working" class people are working our butts of for little pay,they are making 100k+ for NOT doing much of anything.

Rich people are NOT the only ones who "contribute" to taxes...im already poor,do you think I want MY money going to freeloaders especially after how hard I and my fiance have to work?

The system is built against us younger "responsible" adults. Despite what people believe, we want to finish school and REPAY our loans. BUT how are we supposed to that IF those "uneasy" employers do NOT want to pay you your worth? So many times I read how employers ask the WORLD from you but ONLY want to pay you 10-15 dollars hourly and mind you they "prefer" you have a Bachelors. Really?!!

Dont even get me started on those "entry level" SCAMMERS who always want recent grads to do marketing for "commission" ONLY...They always post Must be hardworking, a self starter, "HIGHLY motivated" lol Im sorry but those damn posts crack me up!

People need to stop making it seem like they did not have it easier than young people today. I am going to st leo a "private" school so i can AT LEAST get a decent job after school. I am majoring in accounting/mathematics and plan to go or my CPA in 2yrs.To most of those "traditional" students at their "state" schools,they are having to go back and live with their parents because they cannot get a job. I know a few from UF and FSU doing JUST that. So yeah my loan repayment may be a bit higher but AT LEAST I will have a job to be able to do so.

July 15 2012 at 1:09 AM Report abuse rate up rate down Reply
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March 25 2012 at 2:59 AM Report abuse rate up rate down Reply
rforeverfree

Aw No! You mean that people are really expected to pay their debts? Come on that's not FAIR! Just because they promised on paper to pay the money back now somebody actually expects them to follow through? Bummer.

March 19 2012 at 5:45 AM Report abuse +1 rate up rate down Reply
drbuckles

It's really funny to hear people get the government mixed up with the banksters, the people who created this huge mound of debt for us to pay back. There is a name for these people, rent seekers, people who make money out of nothing, and the American public doesn't understand what has been going on for the last 30 years. These banks have been printing and selling paper all over the world and now they are going bankrupt because they are broke. Yes, all the banks are broke because they are sitting on huge mounds of debt and the FED is printing money to keep them afloat, and they are passing this debt on to the public to pay back by inducing the public to buy into austerity programs and taking a 30% knock down in their wealth and wages. Yes, you are paying for thie bad loans and will be doing so for a long time as they extend these loans out of years to prop up zombie banks, just as they are doing in Japan who as a 1000% debt to GDP. This could be remedied by shutting these vampires down and restarting the system from zero, just as FDR did, but finding someone in these two parties to do it will be hard because these banksters own our government, so it will be up to the people to come forward and make our demands known. The wealthy are supporting these puppets because they own a lot of the paper and stand to lose their asses, but the gamed the system for their own interests so scew them and their political pupets.

March 19 2012 at 12:02 AM Report abuse rate up rate down Reply
lkieger

Here is some advice with a background in business/HR and who got 3 kids through college:

Take advantage of PSEO options and advanced placement at your HS - those credits will transfer to a 4 year college

Avoid the "for profit" colleges like the plague- first of all their admissions standards are questionable, I wont hire anyone with a degree from (fill in the blanK) Capella, Uof Phoenix, Globe, Rasmussen, etc. - these private equity funded jokes are not worth the loans they push on you. RUN from these azzholes. This is a graphic reminder of "socialize the risk/privatize the profit" - they prey on single moms and working adults who can't get into public colleges- load them up with debt. Guess what, the degrees from these places are "questionable." Mitt Romney made a boatload of money on these scams.

Take a serious look at your state college system. Go to community/technical school to get your "generals"out of the way if you can - then transfer those credits to a state college - take out what used to be called the Federal Stafford Loan, and then expect to work part time to help pay for your credits. Take online classes as well from these state colleges...chip away at your degree but get it. Dont' give up.

Looking at a private college? Don't bother unless you want to get into a competitive/top professional/graduate program. Not worth the money. The only one of my kids to go to a private 4 year undergrad program was interested in Medical School. And guess what, admits to medical school overwhelmingly come from private 4 year undergrad programs. So he went that route and it paid off. My other 2 kids graduated in 4 years from state colleges and both are gainfully employed and only "owe" the feds around 17K each - easy to pay off, less then a nice car (payment).

So in a nutshell, take control and don't let the system F with you....

March 18 2012 at 10:34 PM Report abuse rate up rate down Reply
3 replies to lkieger's comment
Curt's Stuff

Once a dead beat, always a dead beat.

March 18 2012 at 7:18 PM Report abuse +1 rate up rate down Reply
Curt's Stuff

Once a dead beat, always a dead beat.

March 18 2012 at 6:55 PM Report abuse +1 rate up rate down Reply
TM

Students cannot figure out and schools do not teach, the simple math and English needed to figure out that if you barrow money, you must pay it back. Loans are something that you pay back. A college education does not now and never has guaranteed automatic success.

March 18 2012 at 6:47 PM Report abuse +4 rate up rate down Reply