Roughly 40 million Americans owe a combined $1.19 trillion in student loan debt, but according to a new Zillow study, student loan debt doesn't impact homeownership probability as much as you'd think.
Student debt has long been deemed a contributing factor for why Millennials aren't jumping into the housing market straight out of school. While Zillow's research found that student loans do indeed affect a borrower's probability of owning a home, it's on a pretty minimal scale as long as you actually obtain a degree.
Homeownership Rates among Degree Types
Overall, graduates with advanced degrees are the most likely to own a home. According to the study, as long as you finish with a bachelor's degree or higher, you may be insulated from the adverse affects of student debt.
How Student Debt Amounts Affect Homeownership within Degree Types
While student loans do lessen the probability of homeownership, the impact is smaller than expected, particularly the more advanced the degree is.
Among the other degrees:
- Someone with a master's degree and no student loan debt has an 80% probability of owning a home. With $50,000 in student debt, the probability drops to 75%.
- Someone with a bachelor's degree and no student loan debt has a 70% probability of owning a home. With $50,000 in student debt, the probability drops to 66%.
- Someone with an associate's degree and no student loan debt has a 73% probability of owning a home. With $50,000 in student debt, the probability drops to 57% (the largest difference among degree types).
Where Homeownership Probability Drops Significantly
Someone with no college degree and no student debt has a 48% probability of owning a home. This rate drops significantly for those who racked up student debt but did not achieve a degree.
If You Have Student Debt & Want to Buy a Home
Fifty-seven percent of adults said that their student loan debt is at least somewhat of an obstacle to buying a home, according to a 2015 NeighborWorks America study. But 87 percent of adults still say homeownership is an "important" component of the American Dream.
So how does someone with student loan debt go about buying a home? By being proactive and educated on what it takes to make that American Dream come true.
Many Americans have several misconceptions concerning mortgage eligibility. Here's what you need to know if buying a home (with or without student loan debt) is a goal for you:
- A 20% down payment is no longer the status quo. There are tons of loan programs that allow eligible borrowers to put down little to no money. For example, VA and USDA Rural Development loans provide 100 percent financing. Other low down payment loan programs include FHA, conventional, MyCommunityMortgage, and IHDA's FirstHomeIllinois.
- Some loan programs allow down payment funds to come from a family member or a state or local government grant. Twenty percent of consumers believe that down payment gift funds cannot come from family members. There are many types of down payment assistance programs that can help homeowners pay some or all of their down payment and/or closing costs.
- Debt is a home affordability and mortgage eligibility factor, but it doesn't necessarily prevent you from purchasing. Most lenders recommend that your mortgage payment, including principal, interest, taxes and insurance (PITI), be less than 28 percent of your gross monthly income. Lenders typically look at your debt-to-income ratio, including your PITI and monthly obligations like student loan payments and credit card minimums, to be at or below 36 percent of your gross monthly income.
The amount of student loan debt you have is a factor in loan eligibility and mortgage affordability, but overall, student debt may not hinder homeownership probability as much as projected.
If you're thinking of purchasing a home in the near future, the best thing you can do is meet with a mortgage banker for a pre-approval. For more information about buying and financing your first home, download our free Mortgage 101 Handbook.