How Millennials Are Buying Homes While Juggling Student Loan Debt

April 08, 2016

Connect Member

Writer at Credible, an online marketplace for student loan refinancing.

Millennials are buying more homes than Gen Xers (ages 36-50), baby boomers (51-69) or members of the silent generation (70-90), despite being loaded down with student debt. Anyone burdened with student loans knows that paying down debt can make it difficult to save money, which rises the question: How are millennials managing to buy homes while making hefty monthly loan payments?

According to a study by the National Association of Realtors, they’re doing it by making some sacrifices. They’re buying smaller, older, and cheaper homes and adding in a little help from their parents or the state they reside in.

A number of state housing finance agencies are helping first-time homebuyers with their down payments, often targeting student loan borrowers and recent grads who are either burdened with student loan debt or have low-to-moderate incomes.

For example: If you have at least $25,000 in student loan debt and are searching for a home in select neighborhoods near Baltimore or Washington D.C., the Maryland Mortgage Program offers a discounted mortgage rate and up to $5,000 in down-payment assistance when you purchase a home in one of their sustainable communities.

Ohio’s Grants for Grads program provides down payment assistance and reduced-rate mortgage for first-time homebuyers with advanced college degrees. Additionally, the state of New York’s Get on Your Feet Loan Forgiveness Program will pick up student loan payments for some recent graduates for up to two years when they remain in the state.

Many other state housing finance agencies also offer similar assistance to homebuyers, including:

  • Mortgages with low down payment requirements and flexible underwriting, where mortgages targeted at first-time homebuyers are available at below-market interest rates.
  • Down payment and closing cost assistance, often in the form of grants or forgivable second mortgage loans that you don’t have to pay back.
  • Mortgage Credit Certificates — dollar-for-dollar tax credits that can reduce your federal income tax bill by up to $2,000 a year.

While many homebuyer assistance programs are targeted at first-time homebuyers, that doesn’t mean you’re automatically disqualified if you’ve already owned a home at some point. The definition of “first-time homebuyer” is typically anyone who hasn’t owned a home in the last three years.

A large issue many borrowers with burdensome amounts of debt face when trying to buy a home is a high debt-to-income ratio (DTI). That’s because too much debt can increase your DTI ratio to the point where you’re disqualified from taking out a mortgage in the first place.

A recent study by Credible found that affordable housing is one of the primary reasons that many young borrowers migrate from one city to another — many borrowers were motivated to move to cities where they could afford to buy a home rather than rent one. After you’ve done what you can to make your student loans more manageable, you can start thinking about how much home you can afford — and how you’ll finance your purchase.

Borrowers of all generations can often lower their monthly student loan payments (and the DTIs associated with those payments) by extending their loan terms, or refinancing with private lenders at lower rates. Federal student loans are eligible for income-driven repayment plans that can stretch loan terms out to 20 or 25 years.

Private lenders offer refinancing through Credible at rates starting at 2.13 percent for variable-rate loans, and 3.50 percent for fixed-rate loans. So, younger generations don’t let your student loan debt hold you back from a purchase. Check in with your state to see what options are available.

Ariha Setalvad is a member of the DailyWorth Connect program. Read more about the program here.