Millennials are often ridiculed for their lack of home ownership and financial foresight compared to past generations. What isn’t often mentioned is the US$1.4 trillion noose of student debt straddling their financial decisions and homeownership dreams.
Saving for a mortgage to eventually buy a house used to be a rite of passage to adulthood after graduation – but with student debt rising to unprecedented heights while graduate wages fail to keep up with inflation, the modern college graduate feels stuck with one of only two choices.
Do you: a) stay at home until you’re in your mid-forties to pay off your loan while sponging off mum and dad; or, b) sell all your non-essential organs to apply for a mortgage while still paying off your extortionate loan?
Condemned as the lazy, ‘snowflake’ generation, doomed to be the first that’s less successful than their parents, it’s estimated that 80 percent of millennials won’t own a home in their lifetime, according to data released by the Apartment List.
While this might be due to their inherent self-entitlement – an apparent symptom of being millennial – it could also have to do with the expensive college education they forked out for before entering a failing graduate market that can’t afford to return their investment.
But all hope is not lost – while looking at how much student debt you’re in can evoke fears of living in your childhood bedroom forever, there is still light at the end of the homeownership tunnel.
Choosing a lender based on your incomings
When applying for a mortgage, the lender will look at both your ‘back end’ and ‘front end’ finances. These refer the loans you already have and your projected income while you repay your mortgage.
Different lenders have different criteria for your finances, so don’t worry too much if one lender rejects your application. This is the beginning of your shopping around window. They should give you an overview of what your financial projections are and benchmark what they deem acceptable.
You can then use this projection to compare different companies and find one that works well for you.
Factor your student loan into your credit score
Your credit score is a summary of your financial habits over a period of time. If you’ve missed loan repayments in the past, your credit score will be worse and mortgage lenders will view you as a risk.
Luckily, your student loan is usually not included in your credit score. It’s seen as a safe, personal investment, unlike unsustainable transactions on a credit card or missed repayments of an outstanding bank loan.
This means that while you may look at your finances and think there’s no way a lender will trust you with a mortgage, it’s usually considered separate to your student debt, so this shouldn’t be an issue in practice.
Instead of seeing your student loan as your biggest barrier to getting a mortgage, instead, focus on your other payments. Do you always pay your bills on time? Do you spend responsibly on your credit card? Do you have outstanding loans?
Always make sure to make payments on time. Source: Giphy
These are all questions you should consider before looking at your student debt to ensure banks they can trust you to repay your mortgage.
Refinance your student loan
Finally, you might consider refinancing your student loan to demonstrate your commitment to becoming debt-free.
Refinancing your student loan means trading your federal student loan with a private company that offers lower interest rates, better payment plans and helps you get out of debt quicker.
If your main goal is getting a mortgage and buying a house as quickly as possible, refinancing your loan can help eliminate outstanding debts and make you look like a more trustworthy borrower.
This is a good option if you have other outstanding payments, or need to improve your credit score for your mortgage application to be accepted.