Is Student Debt Really Hurting the Housing Market?

Young Americans with student loan debt have to earn 34% more, or an extra $8,969 a year, than their peers without education debt in order to buy a median-priced home, a new analysis from RealtyTrac finds.

That may seem upsetting to debtors at first glance, but when you think about it, the figure makes a lot of sense: When applying for a mortgage, you have to exhibit an ability to repay the loan, and if a portion of your income is going toward other debt obligations, you’ll need to make up the difference with more income to reach an acceptable debt-to-income ratio.

Of course, when you’re an 18-year-old deciding to take out student loans, you’re probably thinking about your education, not your future ability to purchase property. It’s not as if you’re making a choice to finance your education over buying a home, either: Most people take out student loans because they don’t have other ways to pay for their degrees, which they’ll likely need to earn decent livings.

The analysis used the average student debt of a 2012 graduate — $29,400, according to the Project on Student Debt — and how that would affect a median income-earner’s ability to afford a median-priced home in 494 counties across the country. The borrowers were assumed to provide a 20% down payment for a 4.13% fixed-rate 30-year mortgage, with a maximum debt-to-income ratio of 43%.

The data from RealtyTrac certainly show student loan debt as an obstacle to homeownership, but they also show it as one consumers are overcoming. In only seven of the 494 counties analyzed for the report did student loan debt affect the borrower’s ability to afford a median-priced home on a median household income: Westchester County, N.Y., and San Diego, Sonoma, Monterey, San Luis Obispo, Yolo and Napa counties in California.

Depending on where they live, some borrowers will need to compensate for student debt payments with an even higher income than borrowers in other parts of the country: In Connecticut, Rhode Island, Michigan and Ohio, consumers with education debt must have a household income more than 50% greater than their peers who have no student loans and want to finance a similar home.

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Given the financial constraints student loan payments bring to a consumer’s budget, borrowers need to find other ways to make home loans more affordable. One is to simply search for a less expensive home, but you can also save money by qualifying for very low interest rates. The better your credit standing, the more likely it is you’ll qualify for the best mortgage rates. In fact, this is how your student loans can help you: By making student loan payments on time every month, you’ll establish a strong payment history, which has the most influence on your credit score. You can see your progress by checking two of your credit scores for free every month on Credit.com.

Before you start shopping for a new home, check your credit scores to see if you can improve them before applying for a mortgage, and remember that no matter what, you must pay your student loans. The same goes for a mortgage, so don’t take on a home loan if it will jeopardize your ability to stay current on any debt obligations.