College grads tend to make more money than those who don’t get a degree. Often, a lot more.
So why is it that recent college graduates make up a smaller-than-expected segment of first-time homebuyers? If they took out student loans in order to earn those degrees, it isn’t hard to figure out.
A new report from Apartment List found many Millennials who are renting their home will, on average, need at least a decade to save the money for a 20% down payment. The authors conclude that, faced with stagnant incomes and rising home prices, many Millennials will be forced to delay homeownership or move to a more affordable location.
The report suggests it’s the student loan debt that makes the difference. Those still paying off student loans have to save for 10 years for a 20% downpayment while college grads with no debt need only half that time.
Even harder for buyers without a degree
Among Millennials without a college degree, however, the outlook for homeownership is not promising. Faced with rising rents and stagnant incomes, most, the report finds, are not saving enough.
They also receive much less financial support from friends and family, and will need more than 15 years to save enough for a 20% down payment. Nearly all metros across the United States are unaffordable for millennials without a college degree, the report found.
While the study assumes buyers will put down 20% of the purchase price, in actuality few first-time buyers do. Most go the FHA loan route, which only requires a 3.5% down payment. For a $200,000 home, that’s the difference between saving $7,000 and $40,000.
A bigger obstacle for college grads with heavy student loan balances may be qualifying for the mortgage. Lenders take existing debt into consideration during the loan approval process. Even if a loan is approved, a borrower with student loan debt will probably qualify for a smaller loan than someone without student loan debt.