Seven of every 10 of young, first-time home shoppers believe their student-loan debt has delayed them from attaining the American Dream—homeownership, the National Association of Realtors (NAR) reports.
College-loan debt is holding Millennials back from the homeownership threshold by up to seven years, a recent study by NAR and the non-profit American Student Assistance.
The NAR study showed that only 20% of Millennials surveyed own a home, while the majority of them carry an average student debt loan of $41,200. The debt is more than their average annual income of $38,800.
However, the following forces are at work nationwide to help make the dream of homeownership more achievable for young, first-time buyers with a heavy load of student-loan debt.
5% Down-Payment Interest
Chicago-based Countryside Bank is rolling out a new program targeted to first-time home buyers who need help saving for a down payment. The bank’s new First-time Buyers Savings Plan includes an option for a high-yield savings account which offers a hefty annual yield of 5% interest—with no hidden fees.
“We truly are committed to putting our customers on the fast track to reach their goals, including homeownership,” said John Wheeler, president and CEO of Countryside Bank.
Builder Debt Payoff
Lennar Corporation, one of the nation’s largest home builders, recently launched a home-loan program that contributes up to 3% of its new home price toward student loans—without raising price or increasing mortgage balance.
Lennar said its subsidiary, Eagle Home Mortgage, will pay off up to $13,000 of outstanding student loans debt, depending on sales price of the home purchased.
“Americans are more burdened than ever by student loans, with $1.3 trillion in outstanding student loans spread out among 42 million borrowers,” said Jimmy Timmons, president of Eagle Home Mortgage. “Millennial buyers are not feeling they can’t move forward. This program relieves some of that burden.”
With Lennar’s the Student Loan Debt Mortgage Program, buyers must meet credit and income requirements and can qualify for loans with down payments as low as 3%. The program is being offered nationwide, including: Minnesota, New Jersey, Washington, D.C., Tennessee, North Carolina, South Carolina and Florida. Lennar currently is not building homes in Illinois.
At closing, Lennar contributes up to 3% of the purchase price to pay down student loans incurred while attending universities, colleges, community colleges, trade schools and other certificate-granting programs. It is not intended for parents who may have taken loans to finance a child’s education.
The maximum loan amount is $424,100. In addition to the 3% contribution to student loan balances, buyers may also be eligible for other incentives—such as credits toward closing costs.
Fannie Mae Debt Program
Fannie Mae recently updated its Selling Guide to help Millennial home owners refinance their mortgage to help pay off existing student debt.
The change allows loan originators who sell mortgages to Fannie Mae to offer a new refinance option for the purpose of paying off debt. Proceeds from the refinancing will go directly to the student-loan servicer to fully pay off at least one loan.
The policy change will likely have the effect of greater availability and lower interest rates for homeowners refinancing their mortgage to pay off student debt. Fannie Mae’s announcement expands upon a program launched last year with SoFi to offer a similar product.
“Swapping student debt for mortgage debt can free up cash in your family budget, but it can also increase the risk of foreclosure when you run into trouble,” said Rohit Chopra, Senior Fellow at the Consumer Federation of America and former Assistant Director of the Consumer Financial Protection Bureau.
“For borrowers with solid income and stable employment, refinancing can help reduce the burden of student debt,” Chopra said. “But for others, they might be signing away their student loan benefits when times get tough.”
Homeowners who tap home equity to pay off student debt give up their rights to income-driven repayment options on their federal student loans, which cap federal student loan payments at roughly 10% of their income, Chopra said.
Income-driven repayment is a critical safeguard during periods of unemployment or other income shocks that help avoid the consequences of default. Homeowners may also be trading away loan forgiveness options available to teachers and others who work in public service.
Borrowers should also consider the tax implications of refinancing student debt. Borrowers who itemize their deductions and whose income is too high to qualify for the student loan interest deduction may be able to take advantage of tax benefits through the mortgage interest deduction when using mortgage credit to pay off student debt.
“For too many borrowers, student debt feels like a big barrier to the dream of homeownership. While these changes won’t change those feelings overnight, they may help the mortgage industry adapt to the financial realities of today’s aspiring homeowner,” Chopra said.
For more housing news, visit www.dondebat.biz. Don DeBat is co-author of “Escaping Condo Jail,” the ultimate survival guide for condominium living. Visit www.escapingcondojail.com.