A house, 2.5 children and a white palisade: This is the classic American Dream. But with the cost of a four-year diploma comparing (if not surpassing) the cost of a modest home, some fear that the ability of young America to achieve these decades-long aspirations could be threatened.
A report by Young Invincible, a policy resource organization, recently looked at how the increase in student debt levels affects the ability of a young graduate to buy a home. As noted in the study, one of the major measures that determines whether a person is eligible for a mortgage is the debt-to-income ratio, or DTI. In the past, mortgage lenders were often more willing to offer some leeway to the DTI when student loans were involved. However, the recent economic and mortgage crisis has forced most mortgage providers to tighten their DTI requirements to better ensure that potential loan borrowers can actually pay their Ready.
Specifically, lenders generally calculate the debt-to-income ratio, giving a complete overview of the borrower’s long-term obligations-and the ability of that person to adequately manage those debts. Mortgage lenders generally examine two DTI calculations: The front and back debt ratios. The first analysis of the borrower’s housing payments, in particular the PITI advance payments (principal mortgage, interest, taxes and insurance), as well as related expenses such as condo fees and assessments of associations of owners.
On the other hand, the DTI back-end ratio adds all other long-term debt obligations to the initial calculation. Three groups of factors related to consumer credit must be considered:
Potential housing payments recurring debt gross monthly income
This figure includes:
Monthly Portion of property taxes
Owner’s monthly insurance premiums
Mortgage insurance premiums (required when the borrower pays a deposit less than 20% of the purchase price)
Other ongoing home-related assessments
This part includes:
Loan Obligations that will require at least six months of additional payments
If the borrower has credit card balances, the lender will typically use 5% of the total balance as the monthly payment for the DTI calculation.
For the DTI calculation, mortgage lenders look at the gross monthly income before taxes and insurance deductions.
The Federal Housing Administration sets a guideline that limits eligibility to 41% for DTI back-end or long-term, but conventional lenders can sometimes provide some additional flexibility. That being said, the individual in the above example might have a hard time qualifying for a mortgage given their debt ratio. However, since there are other factors that contribute to mortgage qualification decisions, including credit ratings and down payments, this person is not necessarily unlucky.
This equation clearly takes into account the debt-the student loans included-. To find out exactly how student debt affects property buyers, the report estimated the average debt and housing payments for young adults with current student loans at varying income levels. The results were divided according to marital status (studies show that this can also be influenced by student debt). Here’s what the Young Invincibles have concluded:
Although student loans do not necessarily give a definitive price for all college graduates, studies show that they can certainly delay the process. If you’re struggling to get started, start by creating a budget that works for you and your goals. Our budget cheat sheet is a good starting point.
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