There are several reasons why people don't become homeowners -- and a big one is debt. The presence of debt can make it difficult to afford or even be approved for a mortgage. And with student loan debt skyrocketing over the past couple of decades, student loan debt could be an increasingly prevalent factor keeping prospective homeowners out of the real estate market.
According to a new report by the National Association of Realtors, student loan debt is indeed preventing many people from becoming homeowners. Specifically, 29% of all student loan debtholders say their loans have impacted their decision or ability to purchase a home. And when you ask people who don't currently own a home, it's even worse.
Nearly half of people with student loan debt already own homes. More than half (51%) of people who have student loan debt but don't own homes say their debt is responsible for their delay. Of this latter group, 46% say they'll use their extra funds toward buying their first home once their debt is paid off. Even among student loan borrowers who own homes, half say they would have become homeowners sooner if not for their student debt burden.
Why is student debt such a roadblock to homeownership?
The obvious reason student loan debt prevents so many people from buying a home -- as well as making other life decisions like starting a family -- is affordability. Generally speaking, buying a 3- or 4-bedroom home comes with a higher level of monthly expenses than a small apartment. Even if the monthly costs of owning a home were the same as renting one, there's an added level of uncertainty surrounding things like maintenance.
A potential homebuyer could even feel they can comfortably afford the monthly payment, but a mortgage lender might disagree. Most lenders want to see total monthly obligations (including the new mortgage payment) totaling less than 45% of a buyer's pre-tax income. In some cases, this can be extended to 50%, but even so, a large student loan payment could easily cause a buyer's debt to be too high for lenders' comfort.
It's also worth noting that this is true even with federal student loan payments having been suspended for more than a year. Your student loan debt still shows up on your credit report as a monthly obligation, and lenders typically consider what your student loan payment would be if you were required to make the payments.
The same can be said if you're on a reduced-payment plan like Pay-As-You-Earn (PAYE). Different lenders have different policies when considering student loan debt for qualification purposes, so ask yours if you're concerned.
Finally, even if a prospective homebuyer could afford a mortgage payment, come up with a down payment, and get approved for a mortgage, that doesn't mean that student debt isn't still a roadblock. Many people simply don't feel comfortable taking on more debt when they already owe so much money and want to make a serious dent in or entirely pay off their student loan debt before pursuing homeownership.
The Millionacres bottom line
Nearly 43 million Americans have student loan debt. If about half of them already own homes, and about half of those who aren't homeowners say that their loans are preventing them from buying homes, this means that roughly 11 million Americans who would like to become homeowners have been forced to the sidelines.
If Congress ends up taking steps to solve the student debt crisis in the U.S., it could unleash tremendous pent-up demand on the housing market. But for now, it appears that the $1.6 trillion in American-held student debt is indeed standing in the way of homeownership for millions of people.