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Home Sales Drop: Could It Be Due to Student Debt Crisis?

An eager young couple working together to afford their first home, a young family moving back in with the in-laws, or a recent college grad moving back home after school. These are the stories that have become oh so common in the United States. As the student loan debt crisis in America continues to grow, the homeownership rate has fallen specifically in younger generations. Student loan debt has increased to $1.5 Trillion in 2018 according to the Federal Reserve Bank.  The sales for homes continues to decline hitting its’ lowest number since 2015 according to a study by National Association of Realtors. According to the survey, more than seven in ten student loan borrowers believe that student loan debt has impacted their ability to purchase a home or take a vacation.

 

Many adult children have had to move home and put off their own dreams to pay down education costs like student loan debt. The daydream of one day buying their first home is becoming just that, a dream. Due to the immense amount of debt acquired during college, it just doesn’t seem possible for people to own their own homes. Let’s take a look at factors affecting borrowers and how they are dealing with housing due to student loan debt.

 

The Feds

Is it possible that student loan borrowers have been placed in tough financial situations in part because of the Federal government’s model for the loans they provided during the 90s and 2000s? The Federal Government provided Stafford and Perkins loans to everyone at the same rate regardless of credit history. If you took out a loan with a private borrower, that lender would evaluate your ability to pay that loan back and would provide you with an amount they saw as acceptable. When providing loans to everybody regardless of credit history, the risk to the borrower is increased. Private institutions operate under guidelines and regulations that require they have “some skin in the game” to prevent risky lending.

 

Many borrowers see public service and not-for-profit jobs as a promising opportunity. Borrowers accept jobs in the public and nonprofit sector hoping to have their Federal student loans forgiven, not realizing the stringent requirement for eligibility to the Public Loan Forgiveness Program.  A recent report released on Septembers 19, 2018 by the Federal Student Aid a Department of the U.S. showed that 99% of borrowers have been rejected for the program. News of the rejection has borrowers feeling helpless with a lack of financial literacy.

 

Transparency

Only one in five borrowers understood all the costs including tuition, fees, and housing according to the NAR survey. Borrowers were using loans for tuitions costs and did not fully understand the amount in which they were borrowing. The lack of responsibility on the borrower can be on part due to the lack of financial understanding and education. Financial literacy continues to become a recurring theme throughout the student loan debt crisis. Many borrowers lack the financial know-how for the most efficient ways to pay down student loan debt. The financial knowledge needed to handle debt, and the rising cost of college tuition has not worked to the advantage of student loan debt borrowers. According to the survey, 32% of student loan borrowers had defaulted or entered into forbearance on their student loan debt.

 

Financial Literacy

Forbearance, deferment, Income-Based Repayment, and student loan grace period are commonly used when paying down student loan debt. What most borrowers don’t know is that unless you have a specific type of federal student loan debt, interest is accruing during this time period. The interest that accrues on your loan during these repayment periods can really end up costing you in the long run. In addition to the lack of knowledge on how to handle the debt, borrowers are unaware of opportunities like student loan refinancing.

 

Paying Down Debt & Housing

Now that we understand a bit more about how student loan debt has gotten to where it is now let’s see how borrowers are dealing with the debt and what their housing situations look like.

 

Moving Back Home

We all know at least one or maybe two young people who have moved back in with a family member after graduating from college. It has become fairly common for college graduates to move back home due to the vast amount of debt and “empty nest” syndrome parents often face. What can differ between households is whether the graduate pay rent to the family or friend in which they have moved in with.

 

Renting

According to the National Center for Education Statistics student loan debt has grown from 5% to 30% of all household debt. Since 2008 the cost of college has risen. This increase in debt has caused an increase in renting. Equifax surveyed millennial renters asking why they didn’t buy a home and 55.7% of respondents listed “student loan debt/not enough money saved” as their reason for renting.  If a student loan debt holder can afford a mortgage payment typically they cannot save for the down payment that is required.

 

Potential homebuyers are having trouble finding homes they can afford according to CNBC. Due to this difficulty, many people are finding themselves renting for longer periods than they would have hoped. National apartment occupancy sits at 95% as of 2017.

 

The Housing Market

As mortgage rates continue to increase so too, does the cost of homes. Both these factors continue to cause a drop in the sales. For example, sales of single-family homes, co-ops, and condominiums have dropped 3.4% from the prior month. Houses have become unaffordable and those with student loan debt cannot find the additional savings for the down payment needed. This drop in home sales could have a strong effect on the market.

 

Looking Forward

 

Employer Benefit Programs

First-time homebuyers should not feel discouraged as there are still many options available. Employers have been stepping up to help employees who are carrying student loan debt by offering benefit student loan debt assistance programs. These programs help borrowers receive resources that they need to pay down debt faster. In addition, the programs give employers the ability to share contributions towards the student loan debt of their employees.

 

Student Loan Refinancing

Borrowers with above 650 credit score and steady income may qualify to refinance their student loan debt. Refinancing student loan debt would allow borrowers to select their repayment terms and could offer a lower interest rate. A lower interest rate on student loans could save thousands over the life of the loan.

 

Education

Secondary institutions and lenders need to better educate borrowers on terms and best practices on paying down debt.  The more resources that can be provided to borrowers the better off that borrower is. In addition, borrowers should not count on qualifying for the Public Student Loan Forgiveness program. Financial literacy also should be addressed to students at young ages. The more we can educate our youth of responsible lending the better off the United States economy can be.

 

Learn More About the State of Student Loan Debt in America Today

 

 

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Top 5 Barriers to Homeownership for Millennials

Most millennials rent their living spaces and don’t purchase them. Ever wonder why that has become such a common stereotype of the millennial generation? Well according to some research done by Urban Institute it isn’t just a stereotype. It dives deep into this issue to explain the main barriers to homeownership for millennials and how to address them. Here are five of those barriers:

Location

Millennials are moving to the biggest cities in the country in larger numbers than any generation before. In these cities (like New York, Chicago, and San Francisco), housing prices are extremely high and the actual housing supply for purchasing is low. You can save money in a major city by using mass transit instead of driving or taking cabs.

Starting a family-

In the past, getting married and having children were the life steps that often led to home ownership. Now, we’re getting married and starting families later in life (or not at all), causing a delay in the need to buy a home. If you are wanting to buy a house, don’t let your marital or family status stand in your way. You can save for a down payment now to speed up the process.

Student debt-

The total amount of student loan debt in the United States is at a historical high, and more students are taking out loans than ever before. Many people who are trying to pay off their student loans feel as if they cannot save for a down payment and do not want to add a mortgage on top of their existing debt. Also, a high debt-to-income ratio can make it more difficult to obtain a mortgage. Refinancing your student loan can help you reduce your rate, allowing you to pay off your principal faster and lower that ratio.

Renting-

Typically before taking the step to owning a home, you will rent a place for a few years. Rental rates have continuously risen for years, which is not allowing people to save as much money for their future down payment. This delays reaching that next step by at least a couple of years. You do not have to let this stop you from saving for a down payment if you are hoping to buy a home soon.

Poor credit-

Low credit scores are plaguing many millennials. The average credit score for this generation is 640, which is lower than both gen x and baby boomers as well as the median credit score for obtaining a mortgage loan. Whether those low scores are from lack of credit, high credit card debt, missing payments, or any other reason, there are plenty of ways to bring that score up.

 

Consider These Factors before Buying Your First House

Tying the Knot on Credit Scores

Credit scores show institutions that may lend to you, if you’re a responsible borrower. It takes time to build credit and once you have, it’s important to keep it. If you aren’t sure how to build credit, check out our building credit blog here. When dating or in any type of romantic relationship, there are certain things about each other we learn pretty quickly. What our partner may like to eat, their favorite type of music, who their friends are, what’s their best angle for a selfie. We’re willing to bet that learning your partner’s credit score isn’t usually at the top of that list.

As your relationship progresses and you look to the future with your partner, your credit scores must be discussed. It’s important to understand where you both stand with your credit and how, or if you both can improve your scores. The importance of good credit cannot be underestimated. Credit is key to determining your ability to borrow money or to take out a loan, so having good credit, both you and your partner, will leave you both with better options. You both will have the ability to select a loan such as a mortgage for a home or a credit line to pay for your wedding that may even benefit you both in return! So how can you work with your significant other to raise their credit score and secure your financial futures?

Education & Open Communication is EVERYTHING

If you have great credit, you must be doing something right! Take the opportunity and show your partner what they can be done regularly to improve their credit score. It’s important to keep in mind you shouldn’t shame your partner for their finances in the past. Remember, it’s likely that your partner did not even realize how important a credit score was!

Your partner needs to feel like they can openly address financial questions and you can both have an open and honest conversation. Try to be encouraging and share your knowledge with them. Educate them on how reviewing a credit report annually to make sure there are no mistakes is important. Sit down together and walk through the first one together.

Be sure to find the problems that caused the poor credit in the first place. Was it missed payments, maxing out of credit cards, or just a lack of any credit history? Together you both can work to find a solution to this problem. There are tons of resources on the web where people can go to learn more and become more financially literate.

Build Trust

If you have good credit and you trust your partner, we mean really trust your significant other, then add them as an authorized user on your credit card. If this is something you’ve really thought about, be sure to use protection. By “protection” we mean, you’re still the primary cardholder and all responsibility of the card is all still yours.

One small slip-up can leave you with an unfortunate looking future … well at least as far as your credit score is concerned. If your partner decides to cheat on you financially and use the card to make purchases that they can’t afford and you don’t have the funds to pay for them either – it can negatively affect your credit score.

Now back to the positive of adding your partner onto your credit card. As the primary cardholder, your credit will not be affected if you add an authorized user. Your partner’s credit report will show the account history. Therefore, if you haven’t missed a payment on the card and haven’t maxed out the available credit, your significant other will get to reap those benefits. This is especially beneficial for partners who lack credit history.

Work for it

Another way in which your SO can build or repair their credit would be to open up a secured credit card. As NerdWallet explains, it is a secured credit card based on a cash deposit that you make when you open the account. They also explain that people who choose this option generally see their credit score improve in about a year if done responsibly. The deposit is usually the credit limit to which you are permitted. For example, if you put down a deposit of $500.00, you would have a credit limit of $500.

Now, don’t think because you put a deposit down you won’t accrue interest. Every other aspect of a secured credit card works the same as an unsecured credit card meaning if there’s a balance you’ll be paying interest. Secured credit cards are also accepted wherever unsecured cards are accepted.

Here are some additional tips to using a secured credit card responsibly as per Nerdwallet:

  • Make only 1 or 2 purchases per month
  • Only use for small purchases
  • Pay the full balance every month – to not collect interest
  • Pay the balance before it’s due.

If you keep the account open and pay your bills on time, you’ll eventually get back your deposit. With a good payment record on the account, most secure card providers will offer the account holder an unsecured card. If you don’t make your payments, then the cardholder will take the deposit, hence why it is a secured card because it is secure for the lender.

The Future

As every couple is unique so too are their credit histories. Whether it’s you or your significant other looking to repair or build credit. We just reviewed three proven methods. It’s important to keep in mind that not all credit is approved. You’ll still need to qualify for most of these options except for the authorized user on a credit card. Remember, this is your financial security as a couple. Your financial security will lay the foundation for the decisions you choose to make regarding finances. Keep working together to reach your goals and we are sure you’ll be so glad that you did!

Learn How to Talk With Your Partner About Finances 

How to Get Your Financial “House” in Order to Afford Your First Home

Most of us enter adulthood with many goals and dreams. You may want a career that not only provides for a comfortable lifestyle, but also fulfills you personally. So naturally, you might seek an undergraduate or graduate degree that provides you with the education and skills to succeed in that career. Obtaining that college degree can help put you on the right path toward achieving your professional goals.

What about buying a home? You may be aware of the fact that you need a good credit score and a down payment to get started, but how do you get there? What is the path that leads to home ownership?

For many young adults, student loans play an important role in this equation. Even if you have a couple of degrees under your belt and you are earning a good income, saving to buy a house can seem out of reach when you are working to pay down student loan debt. In addition, you might be paying just the minimum each month, increasing your overall debt when you could be reducing it more quickly and getting closer to your goal of owning a home.

The good news is that there are ways to speed the process. As it turns out, there is a workable solution that could help you to get your finances in order and reduce monthly payments and perhaps overall student loan debt. With student loan refinancing, you can adjust your financial plan and head in the right direction, potentially reaching your goal of owning a home more quickly. Here is how you can benefit from this process.

Consolidation

The vast majority of students that rely on loans to pay tuition and other expenses during their time in college will find themselves holding a slew of loans after graduation. This means a lot of different payments and terms to contend with, which can be a real hassle.

With student loan consolidation, you may have the opportunity to combine all of your student loans into one, and this can deliver a variety of benefits, including:

  • Convenience
  • A single, lower interest rate
  • Lower monthly payments
  • Reduced overall debt
  • An improved debt-to-income ratio

Fixed Rates

Most college students do not pay a lot of attention to the finer points of their student loans when they accept them – they are more interested in merely getting the money needed to attend school. Once you start paying loans, however, details like rates and terms become a lot more important.

Over the past several years, variable interest rate loans have not proven particularly worrisome, thanks to historically low rates. However, you may have noticed that the prime rate has recently been on the rise, and this may affect anyone with variable rate loans.

When you consolidate loans, you have the opportunity to lock in a fixed interest rate for all of your student loan debt, eliminating any variable rates that could prove problematic when the economy improves and interest rates follow suit.

Low Rates Locked In

With the economy in recovery mode following the Great Recession, interest rates have recently been on the rise. What does this mean for anyone interested in student loan consolidation?

It simply means that seeking student loan refinancing now may help you to lock in lower rates. If you are even thinking about refinancing as a way to get one step closer to purchasing a home, now is the time to talk to a professional, take advantage of your good credit score and get the lowest rates you can qualify for in the event they continue to rise.

Students who have been holding out for student loan forgiveness may be concerned about the current administrations proposed changes to or eliminating these benefits.  By the time the new administration gets through health care reform, tax reform and whatever else is high on its agenda, you could have potentially made significant progress towards paying off your loans, especially if you were able to continue making payments after refinancing with a lower interest rate.

In other words, you’re on your own, and one of the best solutions to cut payments, reduce your debt-to-income ratio and improve your chances for a mortgage loan right now is with student loan consolidation and refinancing.

Don’t forget, mortgage interest rates are also going to follow the prime. If you are able to get in on a home purchase more quickly by reducing student loan payments now, you may also enjoy a lower rate on your mortgage loan, which could entail a huge savings over the course of a 30-year fixed loan.

Reduced Payments

One of the best things about student loan refinancing is that you have the potential to lower your monthly payments. If you are able to reduce interest rates for some or all of your student loans, you will naturally pay less every month, which leaves more money to put toward saving for a down payment on a home.

Of course, you might be wondering if this will end up costing you more in the long run, and this is a valid concern. Oftentimes, borrowers with high student loan debt accept a longer term for repayment in order to make their monthly payments more manageable, and this could result in additional interest accruing.

However, you don’t necessarily have to accept a longer term. If you reduce interest rates but choose a term for repayment that is roughly the same as what you had left on your initial student loan, you’ll still pay less each month and ALSO pay less over the life of your loan.

Student loan consolidation and refinancing is a win on every front for adults interested in finding ways to get their finances in order. When you want to buy a home and your student loan debt is standing in your way, student loan refinancing may help you reach your goal of home ownership more quickly.

Renting vs. Buying a Home

In the past, becoming a homeowner was regarded by most as a long-term goal and benchmark for financial success. However, with the cost of owning a home on the rise, according to a recent Bloomberg article, the national homeownership rate has dipped to its lowest since 1965. Renting is now seen as a more feasible and smarter financial decision for many, especially millennials and individuals in their mid-to-late 30s. Still, those seeking to buy or rent a home want a clear-cut answer as to which is the better option, but it is not that simple — there are many factors to consider. If you are currently weighing the pros and cons of buying a home versus renting, consider these factors in making the housing decision that is right for you:

  1. Your Numbers

As with any large financial decision, it is important to assess your budget and overall financial situation to determine what you can afford to pay for your housing. A great rule of thumb to follow is the 30 percent rule, which states that your housing costs should not exceed 30 percent of your income. With that, you need also consider your other monthly obligations — such as health insurance, student loans, auto expenses, food, clothing, utilities, etc. — when budgeting an amount you are comfortable spending on housing each month. One mistake many people make when deciding whether to rent or buy a home is comparing monthly rent payments to mortgage payments. There are several additional liabilities that come with homeownership, like property taxes, monthly maintenance costs, and homeowner’s insurance, that factor into the monthly payment. Gauging every potential financial obligation that comes with purchasing a home, versus renting, can help you get the most accurate estimation of what you can afford.

  1. Your Area

Depending on the area you are looking at, the costs of renting and buying a home can differ. In some areas, renting is the cheaper option because purchasing a home is simply too expensive. However, in other areas, the cost of purchasing a home may be lower than monthly rent. Try using this calculator from Realtor.com — it will show you the cost of renting versus buying a home, based on your area.

  1. Your Future Plans

One of the main advantages of renting is flexibility. With a mortgage, you are more “tied down,” which means it will be harder to move, if needed, due to the obligation of selling your home beforehand. Renting is more beneficial for those who knowingly plan to move in the near future, as renting affords more mobility in the event of major life changes like marriage or new jobs in different areas. On the other hand, if you foresee yourself staying in the same place for a while, purchasing a home may be the right move for you.

  1. Other Important Factors

Along with considering your finances, area, and future plans, there are other components of renting and buying a home that may be important to you. With owning a home comes more customization — you are free to paint the walls, add a room to the house, replace the carpet with hardwood flooring, and whatever else you see fit. Renting can be more restricting. Maintenance is another factor to consider. When you own your own home, you are entirely responsible for the maintenance of your property, and cannot simply call a landlord to make repairs, as you could with renting. One last thing to consider: Until you fully own your home, it is technically owned by the bank; thus, you are susceptible to foreclosure and completely losing your home if you fail to make mortgage payments.

Decide What is Right for You

Deciding whether to buy a home versus renting is a complicated decision. With all the factors involved, it is impossible to simplify. In some situations, it can be smarter to rent, while other situations and times may prove that purchasing a home is more favorable. Ultimately, the correct decision is the one that is right for you.

 

Top 5 Barriers Stopping Millennials from Being Homeowners