Why Student Loans Are Crushing The Housing Recovery In 1 Chart

Tyler Durden's picture

As The WSJ reports, loan-application data show clear signs of growing student-debt burdens. Through the first half of this year, applicants with student debt carried more than $35,000 in student loans. As most people know, a key metric that mortgage underwriters use to evaluate a borrowers' ability to repay a loan is their total debt-to-income ratio.

It’s this metric that can make student loans a big negative in the loan approval process since new rules that took effect this year place greater legal liability on lenders to properly verify 'affordability' (or debt-to-income ratio). As the following chart shows, and one lender noted, "between the approved universe and the denied universe, a few hundred dollars in student loan debt can push the debt-to-income above the approved threshold."

Simply put, homeownership rates will face pressure until student borrowing slows or until mortgage investors and lenders come up with either more flexible underwriting tools or new loan products (and that never ends well).


As The Wall Street Journal reports,

Data from a top national lender shows that loan applicants with student loans aren’t being turned down more often than those without debt. But the data also show that even small changes in the size of a loan applicant’s monthly debt payments can make a big difference in whether a loan gets approved.

 

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The loan-application data show clear signs of growing student-debt burdens. Through the first half of this year, applicants with student debt carried more than $35,000 in student loans.

 

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A key metric that mortgage underwriters use to evaluate a borrowers’ ability to repay a loan is their total debt-to-income ratio, and it’s this metric that can make student loans a big negative in the loan approval process. New rules that took effect this year give lenders greater legal liability if they don’t properly verify a borrower’s ability to repay a mortgage. Those rules give a greater legal shield to lenders if they verify a borrower’s total debt-to-income ratio is no greater than 43%, which means borrowers with total debt that exceeds 43% of their income could put them at greater risk of being denied.

 

The LoanDepot data shows little difference in average debt-to-income ratios or credit scores for loans that were and weren’t funded. But it does show that, so far this year, loan applications that weren’t funded had almost $500 in monthly student loan payments, compared to around $300 in monthly payments on applications that were approved.

 

 

 

 

 

“Between the approved universe and the denied universe, the [borrower’s] credit is the same. The fundamental difference is a few hundred dollars in student loan debt that pushed the debt-to-income above the approved threshold,” said Anthony Hsieh, the chief executive of LoanDepot.com.

 

These numbers mirror the concerns of some housing analysts, who say that young adults often don’t realize how signing up for thousands of dollars of student debt could hurt their ability to borrow later. “The continual feedback that I hear from the millennials is, ‘I had no idea what I signed up for and what this meant,” said Mollie Carmichael, a principal at John Burns Real Estate Consulting, at a conference last month.

 

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“We’re a slave to the model,” says Mr. Hsieh. Lenders throw the borrowers’ credit and income information in “and see what comes back out.”

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The upshot is that homeownership rates will face pressure until student borrowing slows or until mortgage investors and lenders come up with either more flexible underwriting tools or new loan products... which ended so well last time...

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wagthetails's picture

Rule of thumb: at today's rates, and I mean today, every $100 in monthly student loan payments reduces your potential real estate mortgage by about $20k.

Pmt on a $100k 10 year student loan at 5% is about $1k, thereby reducing your approved mortgage by $200k.

One step further: assume all you have is a $400 car pmt when you graduate and the $100k student debt. You need $75k salary to borrow $212k. Expect less in reality as you most likely have a weak credit score due to lack of history. (Interesting side note, if 30 year increased 1.875% to 6% the max loan drops to $171k....can real estate ever recover with increasing rates?)

Hondo's picture

When I got out of undergad in the mid '70's my student loan was about 31% of the then "real disposable income per capita" number.  Based on the article that number would be near 93% today.  An insane amount to be sure.  I didn't buy a house until I was 8 years out of undergrad and had 2 years left on the student loan.........I was paying about $54 per month and I think the interest rate was around 4-6%...which was a pretty low rate considering where interest rates were back in the mid '70's.