by Lee Nelson
When you are in college, it’s a whole different world of independence, exploration and hopefully inspiration. But it also is a reality check about finances. If you don’t have someone paying your way, most likely you are signing those papers and taking out student loans without much thought about how it might affect you in the future.
But it can do some damage to your buying abilities once you graduate.
According to the Cambridge Consumer Credit Index released last fall, almost two-third of Americans with students loans (64 percent) say their student loans do prevent them from buying a house, car or other expensive items. Thirty percent of them with student loans say that the loans are a major burden. But the good news is that 37 percent of Americans with student loans say the debt does not pose a burden.
So these are the folks that can find that perfect first house or condo, sign a mortgage and head into the American dream. How do they do it?
“It’s all about buying power,” says Joe McBreen, senior loan officer at The McBreen Group in Chicago. “It’s important to use your debt and establish a high credit score. But you can’t exceed that 30-45 percent debt to income ratio.”
He just recently had a client who was fresh out of law school. She was young, had a great job and was ready to buy that first home.
“But she had $120,000 in student loans. If she hadn’t had so many student loans, she would have had more buying power and could have gotten a bigger and better home,” he says. “She did qualify for a mortgage, but it was a little bit less of a loan and little bit less of a home than what she wanted.”
According to a recent TransUnion study, student loan balances have increased 30 percent from 2007 to 2012 to $23,829. That’s the price of a new car for many. They do get between 10-20 years to pay it off. But the debt can take away a few hundred dollars or more each month that could have gone toward life’s expenses, including a mortgage.
Some of McBreen’s tips for those with high student loans is to first consolidate those student loans if you have three, four or upward in different loans. He has seen applicants with student loan payments of $1,000 a month, but most of those are doctors or lawyers with six figure loans.
“If you consolidate, you can get them all into one payment, and hopefully get a lower interest rate and a lower monthly payment which makes it look better when applying for a mortgage,” he says.
Another tip is to use your credit cards sparingly and to pay more than the interest on them each month.
“If you only pay the interest, it can have a negative impact on your credit score,” he says.
Let’s say you have three cards with $5,000 limits on each, and you only put $1,500 on each card. That’s a good thing not to max them out or just pay the minimum on them each month, he says.
“If you just have one or two cards that you use to pay your bills or buy your groceries and gasoline each month and then pay it off every month, that builds your credit score a lot,” he said. “By using your credit cards and paying them off without accumulating any interest, you are building a better credit score quickly.”
Eugenia Foxworth, realtor for Foxworth Realty in the Bronx, New York, has been seeing many young people recently with big student loans getting a break with mom and dad’s help.
“You can get a mortgage if you pay your bills on time, have a job and do not have a lot of outstanding debt. But for those that just don’t have enough income to get that loan for their first home and have hefty student loans, their parents are becoming the guarantor (co-signer) on the mortgage,” she says.
And she also is seeing parents who are just buying the condos for their college-educated children.
“They either get the loan themselves or buy it outright with cash, and then they work out an agreement with their kids to pay them rent or something like that,” she says.
She has come across that situation three times just in the past few months.
“One was quite interesting where the parents gave enormous amounts of money to their three children. One of their sons who had just graduated from college could get a mortgage on his own, but the parents gave him enough that he paid the full amount of $750,000 for a condo. It’s gotten a little crazy out here in New York,” she says.
Not everyone is that lucky to be born into a family with big chunks of cash. So, she suggests to her buyers to get their credit score up to at least 700.
“Young people are up against a lot of things. But they need to establish a record of paying their bills on time,” she says.
Apply for a home loan here. See what you can qualify for, even if you have high student loan payments.
Lee Nelson writes for national and regional magazines, websites, and business journals. Her work has appeared in Yahoo! Homes and many Hearst publications such as Life@Home and Women@Work.