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Many people these days have a college degree. In fact, according to the Pew Research Center’s analysis of Current Population Survey data, “four-in-ten millennial workers ages 25 to 29 had at least a bachelor’s degree in 2016.” When you compare this group to the baby boomer generation, who has a lower percentage of college graduates, you can see how society has shifted its norms and expectations. The baby boomer generation ranks third in education attainment while millennials are at the top.
With the growing trend towards higher education also comes the growing debt load. In 2018, the “outstanding student loan debt in the U.S. surpassed $1.48 trillion, almost one-and-a-half times what Americans owe on credit cards.”
With the student debt so steep for many would-be homeowners, what does this mean for the housing market, and more importantly what does this mean for the millennials who are at the age of buying a home? The fact is many millennials are not buying a home. According to the Urban Institute, only 37 percent of this group owns their own home.
There are several reasons why millennials are not buying houses. Some of these reasons include affordability, millennials are waiting to get married, there are tighter lending guidelines, and they don't want to settle down. But one of the more significant reasons why this group is not purchasing a home right now is that while they were pursuing a college degree, they accumulated a great deal of student debt. This financial burden makes it difficult to take the leap and buy a home. However, there are steps that recent college graduates or millennials can choose if they want to purchase a house soon. It’s best to begin preparing as soon as possible, so when the time comes, you’ll be ready.
Prepare to Purchase a Home Even if You Have Student Debt
Aim for Low-Interest Mortgage
When purchasing a home, we try to get the lowest interest possible. A low-interest rate is especially important for the person who is already strapped with a debt load. One way to get lower interest is to shop around and check the rates, but usually, banks are similar. So, you need to take the plunge when the housing market is ripe for buyers. When the housing interest rate is fair or low, that’s when you want to start considering jumping in. Right now, we do not see any housing crisis that drives up the interest.
Another way you can get a better interest rate is if your credit score is excellent. If you have any problems with your credit score, now is the time to work on your score, and try to increase the number (more on that below).
Increase Your Credit Score
As noted, increasing your credit score will help with the interest rate on purchasing a new home. Lenders are more apt to give a competitive price to someone with a higher score. How can you raise your score if it’s low or average? Here are a few ways to increase your score:
Check your credit report for any inaccuracies. Many people are surprised to discover that there are mistakes on their credit report. If you find any, notify the credit reporting bureaus, and have them correct it.
Pay all your bills on time. Your payment history will have an impact on your score.
Decrease your credit utilization ratio. Your credit utilization is calculated by figuring the ratio between your credit limit and the amount of credit you are using. A lower ratio increases your credit score. Generally, a utilization ratio below 30 percent is desirable.
Keep a good mix of credit including loans, credit cards, and personal lines of credit, but don’t open credit just for the sake of opening it. However, if you increase your limit on a card, it will make your utilization ratio lower.
Reduce Your Debt-to-Income Ratio
When lenders look at your credit profile, they don’t just look at your credit score; they also look at your debt load. They want to know if paying back a mortgage is going to be difficult for you. They use formulas and calculations to determine whether a person is a loan risk. One such calculation they use is the debt-to-income ratio (DTI). This ratio is calculated by adding all your pre-tax income and dividing it by your debt expenses. They don’t take into account your ordinary living expenses such as utilities, food, and so on but are primarily concerned with your debt. Banks usually like to see a DTI at 35 percent or lower.
Apply for a Mortgage
Finally, the last step you can take if all the above steps are in place is to apply for a mortgage. This will allow you to see where you’re at and what you qualify for. There may be loan programs that are available, of which you can take advantage. Sometimes taking that first step is the hardest, but it will get you started in the process.
There is no better time to start preparing for the future than the present. Take action now to improve your credit and reduce your DTI. Then you can begin dreaming about your new home!