The biggest purchase you will ever make in your life is a new house. But 99% of us won’t be able to afford it so we’ll need to get a home loan instead. Typically you would go to high school and get good enough grades to make it to a good college. Then you would accrue student loans as you complete your education. After that you would find employment, buy a car and buy a house. If only it were that simple.
With tuition rates continuing to rise we’re seeing student loans climb to insane numbers. Some students are graduating with well over $50,000 in student loan debt. That’s not a good way to get started on the rest of your life. While student loans usually have low interest rates, that is still real money that needs to be paid back.
Throughout the time you went to school you never paid a dime toward this debt. You didn’t have to. But now that you’ve graduated, the bank expects you to find a good job and begin to pay them back – with interest.
But what if you can’t pay back your student loans? The first thing that will happen is you will be late on a payment. Your credit report will show you are 30 days late and you may even be hit with late fees. If you’re 60 or 90 days late or are late multiple times, your credit score will take a tumble. Did I say tumble? More like a drastic drop to the bottom. If you get the account current again and continue to make timely payments you can get your score back up again rather quickly though.
At some point after college you are going to want to buy a house. In order to qualify for a mortgage, however, you are going to need solid income, a 20% down payment and a good credit score.
Let’s say your college education managed to land you a very nice job and a solid income. As for the down payment, 20% on a $400,000 home is a whopping $80,000. How in the world is someone new to the workforce going to save up that much money? If you thought qualifying for a home loan got easier, it doesn’t. The next stumbling block for many in their quest to buy their first home is their credit score.
To maintain a good credit score requires you to make every student loan payment on time, every time. This is much easier said than done however. Recent grads are just adjusting to a new job, a new car and paying rent. So you can understand how difficult it could be to keep up to date with their student loan payments.
Unfortunately, for many, grads with an enormous amount of student loan debt will not be able to buy a house until their loans have been completely paid off.