mortgage Archives — Beating Broke

What Effect Does Student Debt Have on Home Ownership?

November 14, 2015 By Satinder Haer Leave a Comment

Millennials are doing things differently than previous generations, especially when it comes to homeownership. Compared to just a couple decades ago, first-time home buyers today are delaying home purchases and renting for longer – and most are millennials. The low rates of homeownership in this demographic have been primarily blamed on overwhelming debt from student loans. After all, Americans owe a combined $1.2 trillion in student debt. While student loan debt can impact an individual’s ability to save for a down payment or qualify for a mortgage, new data suggests it is a myth that student debt is the reason homeownership rates are low among recent graduates.

As long as you get a four-year degree or higher, the effect of student debt is actually negligible on your probability of becoming a homeowner. If you obtain a bachelor’s degree with no student debt, you have a 70 percent probability of owning your home. Someone who graduates with the same degree and $50,000 of student loans has a 66 percent probability. The likelihood of homeownership only drops a measly 4 percent even with $50,000 of undergraduate debt.

For married couples, the key is getting at least one degree between the pair. If at least one spouse has a bachelor’s degree and no student debt, the couple’s probability of homeownership is 69.8 percent. Add in $30,000 of student debt for that degree and the probability drops a mere 2.1 percentage points. Getting approved for a loan or saving for a down payment might take time but the research shows student debt isn’t a major hurdle in homeownership, whether you’re married or single.

Graduate school loans have an equally minor effect on homeownership. Obtaining a masters, medical, law or doctorate degree actually insulates you from the adverse effect of student debt when you buy. The probability of homeownership is highest for individuals with a doctorate and no student debt; they have an 87 percent chance of owning homes. That likelihood only drops to 84 percent if the individual incurred $50,000 of student loans obtaining the doctorate. At the master’s degree level the probability falls from 80 percent if you have no debt, versus 75 percent with $50,000 in student loan debt. Getting an advanced degree increases your overall likelihood of owning a home, despite the small negative impact student loans have on your probability of homeownership.

Individuals with an associate’s degree or no degree are impacted the most by student debt. The probability of homeownership drops from 73 to 57 percent if you obtain an associate’s degree with no student loans versus carrying $50,000 of debt. And for those with no degree, homeownership probability is even lower. The probability of homeownership is 48 percent for an individual with no degree and no student debt and declines steadily with the debt amount. Getting at least a four-year degree significantly increases your odds of owning a home.

The outlook is positive for millennials who want to become homeowners. Not only should student loans have a minor effect on ownership, the research reveals millennials who put down 5 percent and spend 30 percent of their income on a mortgage can afford 70 percent of for-sale homes on the market. While this inventory isn’t spread evenly across the country, buyers who focus on properties in the Midwest and South can afford as much as 86 percent of the for-sale homes. In major metro areas, the pickings are much slimmer; millennials can only afford 25 percent of the inventory in Los Angeles and 27 percent in San Diego. Location is key to affordability, especially for individuals also balancing student loan debt.

Recent graduates should not shy away from exploring their options. It’s surprising how many homes millennials can actually afford, despite their student loan debt.

3 Key Factors That Affect Your Home Loan Eligibility

January 18, 2015 By Thomas Bawdy Leave a Comment

A home loan can put a prospective homebuyer on the fast track to owning their own home by giving them the resources they need to move into a new home, and lenders will commonly offer up to $500,00 in financing to qualified applicants.

However, not everyone is eligible to receive the same amount of funding from lenders based on their individual circumstances. There are a range of considerations that go into the borrowing power of a given applicant when seeking out a home loan such as amount desired and credit score, but there are a few less obvious factors that can make or break a person’s ability to secure funding for the home of their dreams.

Income and Resources

The income and resources of an applicant are perhaps the most important aspect of their eligibility for financing, as they give a good indication of a person’s ability to repay the loan when it comes due. Direct salary as well as investments, inheritances and other income types are all commonly considered, and good ratings in this area can often offset lackluster evaluations in other facets.

Banking History

An established history with a lender can give a prospective home buyer a fighting chance of securing the necessary funding. Banking institutions see each borrower as a risk of lost investment to a certain degree, but an existing banking relationship gives a lender familiarity with an individual and their financial habits, and so it can be a good idea to seek out a home loan at an institution at which there is an active bank account in good standing already in place.

Down Payment

The amount of an applicant’s down payment can give them tremendous flexibility where securing a home loan from a bank is concerned. Lenders will commonly finance up to 95 percent of a home transaction, and so virtually any applicant should have at least 5 percent of the desired loan amount available at the time of application.

Of course, any amount significantly above this figure bolsters the borrower’s leverage, and a larger down payment now can mean smaller monthly payments and a lower interest rate later.

While it is possible for prospective homebuyers to obtain a home loan even if these critical factors are not necessarily in their favor, the available options for these individuals are often unattractive, as they can include high interest rates, uncommonly extensive repayment periods, exorbitant penalties and other undesirable terms. The amount a person can borrow from a lender is effectively unlimited in theory, but in practice, the borrower can only receive what the bank is comfortable lending.

Eminent Domain as a Mortgage Fixer?

August 12, 2013 By Shane Ede 7 Comments

The housing crash of 2008 is still sitting heavy on many homeowners. Many who bought a house during the peak of the market were left with houses that they’d bought at nearly twice the current value of the home. Much has been said about the dilemma that those homeowners find themselves in. As the economy receded, so too did their jobs, and their pay, causing many to simply walk away from their homes when they could no longer afford the mortgage.

Foreclosure is a bit of a messy deal. The bank takes the home back, and then sells it, attempting to recoup some of the value of the mortgage. We’ve seen many different methods of attempting to avoid the bulk foreclosure of homes in America. From Government sponsored programs that help with restructuring of the loan, to banks voluntarily restructuring the loan, to what is a rather disturbing new program in Richmond, CA.

The program is laid out in this recent article on CNN Money. (California city’s drastic foreclosure remedy: seizure) In the article, the City has started a program to attempt to purchase the mortgages of many underwater loans in the city. It’s an attempt to avoid the decline of low-income neighborhoods, and those neighborhoods already hit hard by the economy. Seems pretty normal, until you read a bit further.

But if the holders of the loans, who are mostly investors, refuse to sell by Aug. 14, the city said it will invoke eminent domain to seize the mortgages so it has more control over the process of making them affordable.

That’s right. If the investors refuse to sell by August 14th, the city will invoke eminent domain and seize the mortgages in order to bring those mortgages into the program.

There are several things at play here. I don’t argue that there are many who are nearing foreclosure, and that in many cases, they were preyed upon by the banks and investors by being given loans for houses they couldn’t afford in the first place. I don’t think that excuses the buyers from not knowing that they couldn’t afford the mortgage. I’m sure there are those that could afford the house at the time of purchase, but have since fallen on hard times. In some cases, I do think that there should be something in place to help people ease the pain of their mortgage. But, that’s another article.

Back to Richmond, CA, and their silly new program. They plan on using eminent domain to seize the mortgage. As is pointed out in the CNN Money article, eminent domain is usually used by public entities to seize physical properties to make way for public parks, malls, and right-of-ways for transportation initiatives.

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The article alludes to the fact that eminent domain, to be legal, must be used for that are in the public interest. Meaning that the people of the city (or neighborhood) must have something to gain from the seizure. I think this is a bit of a grey area, and is likely to end up in court. It’s legality, in the seizure of only certain mortgages, and not the mortgages of the entire neighborhood, makes its usage for the public interest somewhat shaky. After all, who among us wouldn’t want to participate in a program that cut our mortgage in half and reduced the payments by the same? Absolutely! But, who among us has anything to gain by having our neighbor across the street participate in the program, and not us? Yeah. Even if I can afford my mortgage, I’d be a bit jealous. If I really wanted to cause a scene, I’d sue the city.

Legality aside, I still think the program is a mistake. Many places around the country are facing the same dilemma, and many are trying to find innovative solutions to fix the problem. The city of Detroit just declared bankruptcy because the population of the city, and thus it’s tax-base, has dropped so drastically over recent years. Perhaps the city of Richmond fears the same problem. What they should be spending their time fixing, however, is their local economy. They’ll spend all kinds of money executing this program, then defending it in court, only to still have the same economy.

If they can find ways to improve the economy by pushing local businesses, promoting local producers, and making improvements to the structures to do so, I think they’ll find that many of those foreclosures start getting picked up by new homeowners.

Maybe I’m wrong. I’m certainly not an expert in economics, least of all economics in California. What do you think? Is the usage of eminent domain here a valid one? Will it be challenged legally? How would you feel if your city had a program like this?

Original image credit: End Eminent Domain Abuse by Paparutzi, on Flickr