In the late 1990s, Ed McKinley fell in love with a $65,000 house by a lake in New Hampshire.
The owners let him move in early and pay rent until the buying process was completed.
Inside his new home, McKinley installed a modern stove, painted the walls and began to redo the floors.
Then came the bad news.
“The mortgage company decided that my income-to-debt ratio was a little bit higher than they were comfortable with,” McKinley, 59, said.
They were referring to his $34,000 in federal student loan debt.
He had to pack up and leave.
“It’s crushing,” McKinley said, choking up. “I have a very strong desire to own a piece of land that I can put my signature on.”
Student loan debt has become a major barrier to home ownership in America.
Some 45 million people in the United States carry student debt. The average borrower owes more than $30,000, according to Student Loan Hero, a website for managing education debt. Almost a fifth owe more than $100,000, according to the National Association of Realtors.
People’s monthly student loan payments can eat up a large slice of their income, threaten to push down their credit scores and make saving nearly impossible — all huge impediments, of course, to landing in a house.
For every 10 percent in student loan debt a person holds, their chance of home ownership drops 1 to 2 percentage points during their first five years after school, according to the Federal Reserve.
More than 80 percent of people ages 22 to 35 with student debt who haven’t bought a house yet blame their educational loans, according to the National Association of Realtors.
“Student loan debt holders do want to own a home, that’s part of their American dream,” said Jessica Lautz, managing director of survey research at the National Association of Realtors. “It’s just really hard to get there right now.”
To be sure, people who receive more education also tend to earn higher incomes, possibly offsetting some of the financial distress of student loan debt, said Jonathan Spader, a senior research associate at the Joint Center for Housing Studies at Harvard University.
“You have these competing influences of greater access to education versus reduced ability to buy a home because of student loan debt,” Spader said.
Challenge one: Debt-to-income ratio
Almost one-fifth of people with student debt who apply for a mortgage — like McKinley — are denied because of their “debt-to-income ratio,” what a person owes versus how much they make, according to the National Association of Realtors.
The median income for student loan borrowers is $59,746, according to analysts at the Harvard joint center. For borrowers under 30, the average monthly loan payment is $351, according to Student Loan Hero.
“The bank looks at it as ‘unsecured debt,'” said Doug Amis, a certified financial planner at Cardinal Retirement Planning in Cary, North Carolina. “With a mortgage, you have the asset of the house. If you stopped paying, you could foreclose on the house. But you can’t go and foreclose on an education.”
In other words: Banks know you’ll most likely be stuck with your student debt until you pay it off.
“The mortgage officer wants to see that your overall expenditures on housing and debt — including student loans and car payments — is not more than 36 percent of your income,” Amis said. “That’s really going to limit things if you’re only making $50,000 a year.”