How Banks Can Help Young Homebuyers Manage Student Debt
Banks can boost mortgage profits with the help of direct call centers and products like adjustable-rate mortgages and jumbo loans, writes Stratmor Group's Garth Graham.July 31
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Many younger college graduates have postponed life decisions like marriage and homeownership as they cope with student loan debt and limited well-paying job prospects. In fact, Mortgage Bankers Association chief David Stevens says his own 27-year-old daughter is personally experiencing the quandary of whether to take the risk of becoming a homeowner despite having a good job, solid and stable income, parental support for a down payment and a rent payment of over $2,100 per month.
Student debt will continue to have an extraordinary dampening effect on young peoples ability and willingness to borrow for a home, Stevens says, and thats going to impact the housing market and the economy at large.
Overcoming student loans chilling effect on mortgage demand is a real challenge for banks. Yet with interest rates low and home prices reasonable in many areas across the U.S., housing affordability remains at historically high levels. If banks want to succeed in the purchase-money mortgage market of the future, they will have to step up their efforts to educate potential first-time homebuyers about the fact that mortgages may well remain within reach.
Many banks already have financial literacy programs in place. But the educational process should begin long before students graduate from college. In fact, the starting point for younger bank customers should be helping them to understand how taking out substantial loans for college could hamper their ability to borrow for other things in the future. Banks should provide examples of typical repayment structures for college loans and explain the likely monthly costs of various levels of debt. Education on this topic could be offered to all customers who are close to graduating high school and advertised on bank websites.
Bank customers who are a little older may already have significant student loan debt as they enter the stage of life in which purchasing a home could be an option. These customers need a different kind of education.
These customers are likely to have limited savings, at least partly as a result of their student debt obligations. They may also harbor some deeply rooted misconceptions about the affordability of homeownership, particularly when it comes to down payment requirements. A recent survey by Zelman and Associates shows that the average first-time home buyer thinks that the minimum required down payment for a home loan is 11-15%.
But as readers of this publication know, Federal Housing Administration loans and conventional loans with private mortgage insurance can often allow borrowers to obtain a mortgage with as little as 3% down. In many cases, family resources can make the loan qualification process even easier.
Banks can help potential homeowners learn more about their options by directing them to powerful tools like the database of 1,000 homeowner assistance and grant programs maintained by the Atlanta-based firm Down Payment Resource. Many of these programs can be accessed by individuals who earn between 100 to 120% of their areas median income. The firm also offers information about special financing programs, rehabilitation loans and Mortgage Credit Certificate programs that allow borrowers to claim a tax credit on a portion of mortgage interest.
Borrowers with private student debt may also be able to lower their monthly payments through debt consolidation or refinancing. Several banks have already entered the student loan refinancing market, and even more are likely to consider it as a means of helping millennials to consider a home purchase. These consolidation and refinancing programs should include a component on basic financial skills, such as maintaining a solid credit standing by making timely bill payments.
There is no doubt that the housing market has changed as a result of student loan debt. Educating young people and their families about how they can make homeownership an affordable part of their lives is a great way for banks to build future business, demonstrate their value to the real estate community and assist customers as they work through the challenges of student loans.
Garth Graham is a partner with Stratmor Group and has over 25 years of mortgage experience.