With the cost of a college education high and rising, more students are putting themselves deeper into debt than ever. But those huge debt loads don't just pressure students to find high-paying jobs after they graduate: They're also making it nearly impossible for some to get the financing they need to buy a home.
Ever since the financial crisis, banks have been a lot more careful about giving out mortgage loans. Having been burned by their low standards during the housing boom, banks are now doing everything possible to avoid a repeat of those massive losses. Moreover, having just entered into a $25 billion settlement with state and federal government officials over their foreclosure practices, banks are eager to steer clear of situations in which they might need to repossess a home.
For young borrowers seeking to buy a house for the first time, the tighter credit standards that banks are now using have made it extremely difficult to get a mortgage. When you add in existing student loan debt that can range well into six figures, the prospects get even worse.
No, You Still Don't Qualify
Even graduates who succeed in landing lucrative jobs can find themselves unable to get mortgage loans.
The lack of credit history combined with reluctance on banks' part to trust a short employment record in a spotty economy hits first-time homebuyers especially hard.
According to the Federal Reserve, among those ages 29 to 34, only 9% got a first-time mortgage over the past three years, compared to nearly twice that figure a decade ago. With student loan debt near the $1 trillion mark, the problem isn't going to go away anytime soon.
It's the Debt That Doesn't Die
Student loan debt payments can easily eat up a large fraction of your paycheck. But those loans scare banks even more because they're one of the toughest forms of debt for borrowers to get rid of. Even in a bankruptcy filing, student loan debt doesn't get forgiven unless it puts what bankruptcy laws call an "undue hardship" on the borrower.
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Given how hard it is to prove an undue hardship, student loan debt usually sticks around. Although banks making mortgage loans get priority to repossess a home, the complications of having high student loan debt involved make an already difficult process even more complicated.
The irony here is that first-time homebuyers could actually help the banks recover from the housing bust -- if they could only get mortgage financing.
In addition to helping eliminate the huge backlog of inventory at the lower end of the housing market, more buying from first-time homebuyers would also free up homeowners who've been stuck in entry-level homes to move higher up the price spectrum. That would create a cascade effect that could potentially make the overall housing market a lot healthier.
What to Do If You Have Heavy Student Loan Debt
Until conditions get better, you'll have to take steps of your own to improve your chances of getting a mortgage if you have a lot of student loan debt.
Start saving now for your down payment. Most first-time homebuyers try to pay as little as possible upfront when they buy a house in order to save cash for other purposes. But small down payments make banks nervous. Having a larger down payment not only puts lenders in a safer position but also demonstrates your money sense.
Shop around. Just because some lenders don't want to deal with you doesn't mean you won't have success anywhere. If big national banks won't lend to you, check out smaller local banks or credit unions. You may get a completely different reception there.
Do what you can to pay down your student loans. Establishing a solid credit history through your student loan debt is extremely valuable when you make your case with a mortgage lender.
Getting a mortgage is tough right now. But with these simple steps, you can boost your chances of being able to turn your American Dream into reality.