Esther Phillips is senior vice president of Key Mortgage Services
Inc., which is licensed in Illinois, Indiana and Wisconsin. She also
is a member of the company’s executive committee. Phillips has
more than 20 years of experience in the mortgage and financial-services industry and is a seasoned executive skilled in sales
leadership, operations management and team building. Reach
her at email@example.com.
Millennials have had a complicated relationship with homeownership. They are the nation’s largest living eneration with a population of ap-
proximately 75 million, but the homeownership rate
for those under 35 — the age group encompassing
millennials — is at an all-time low. On the other hand,
more than 90 percent of millennial renters say they
want to be homeowners.
Unfortunately, the dream of homeownership is
often dashed by the harsh economic reality that most
millennials are worse off financially than their parents
were at their age because of slow wage growth and
student-loan debt. When asked if they want to purchase now, two-thirds of non-homeowners who have
student debt say they are uncomfortable borrowing for a mortgage and also less likely to believe they
could even qualify for a mortgage, according to a 2016
National Association of Realtors consumer survey.
The financial website The College Investor estimates
that the graduating class of 2016 started their professional lives with an average of $37,172 in student-loan debt, more than double the debt accrued by the
class of 2003 ($18,271). Considering these figures, it’s
clear how the financial and emotional toll of repaying
student-loan debt is contributing to a delay in millennials purchasing a home.
Changes in mortgage underwriting have not been
favorable to millennial borrowers who are saddled
with student debt. To start with, there have been
recent shifts in how underwriters could treat student debt. Previously, student loans that were in
deferment for at least a year were excluded from
debt-to-income (DTI) ratio calculations.
The change led the Federal Housing Administration
(FHA), Fannie Mae and Freddie Mac to require
1 percent of an applicant’s outstanding student-debt balance to be calculated as part of DTI for
loans underwritten to the agencies’ guidelines —
even if those loans are in deferment. Freddie Mac
allowed for a more lenient treatment of student loans,
clearing the way for other options for qualification
— including using projected monthly repayment
amounts on deferred loans in calculating the borrower’s DTI ratio. The bottom line, however, is that the
DTI ratio can essentially make or break a borrower’s
Too high of a DTI, above 43 percent to 45 percent, can pose a high risk for default. Borrowers with
$60,000 in student-loan debt whose payments are
currently deferred for 18 months, for example, could
reduce their buying power by as much as $122,000 by
using 1 percent of the outstanding debt total. Thus,
underwriting guidelines can force applicants to pur-
chase “less house” because they can only qualify for
a smaller mortgage.
Even for millennials on sound financial footing, the
process of paying back student loans can create challenges when it comes to qualifying for a mortgage.
Income-based repayment (IBR) plans, which are
designed to reduce student-loan bills to a manageable percentage of monthly income, became popular as millennials began landing their first jobs. These
plans, however, also placed them in a conundrum
of extending the life of the loan and paying more in
All student loans — whether deferred, in forbear-
ance, or in repayment — must be included in a bor-
rower’s recurring monthly debt obligation when
qualifying for a home loan. Freddie Mac and U.S.
Department of Veterans Affairs (VA) loans will accept
the monthly payment as reported on the credit report,
and VA will allow for deferments over 12 months not
to be included DTI calculations.
Smaller Is Mightier
Independent mortgage companies can better capture millennials
By Esther Phillips
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