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Buying a Downtown Boston condo with student debt

Updated: Boston Real Estate Blog – 2021

Student debt holders and minorities tend to purchase lower-priced homes, leading to lost wealth accumulation over time, according to a new working paper, “Mind the Gap: Home Price Differences By Race and Student Debt.” The research, which evaluates purchase price differences among home buyers from January 2014 to December 2017, was conducted by Jessica Lautz, vice president of demographics and behavioral insights at the National Association of REALTORS®, and Michael White, a professor with Nottingham Trent University and director of the Centre of the Built Environment.

In the study, Lautz and White found that buyers who had student debt tended to purchase homes that were 18.8% less than those without student debt. Hispanic and Black Americans purchased homes that were 11.2% and 10.6% less expensive, respectively, than white Americans. The study controlled for household income, home size, location, and down payment assistance from family.

The authors say there are long-term implications to this purchase price gap—one that could stretch even across generations in time.

“The current housing affordability crisis has only exacerbated the homeownership gap by race and especially among those with student debt,” Lautz says. “Without policy intervention the homeownership gap will only continue. Unfortunately, the homeownership gap is not only one snapshot in time, but contributes to lost family wealth, which persists into future generations.”

Homeownership has long been considered one of the best ways to build wealth over the long term. Buyers who purchased lower priced homes than other buyers are more likely to be impacted by housing affordability constraints and later on could lose out on wealth accumulation, the authors note. This could create a “cycle of lost wealth.”

Student debt holders face the largest home purchase price differences. “The housing shortage is most likely to impact entry-level buyers who may be priced out of the home buying market, facing a need to move to a rural area with fewer job prospects, which limits the ability to pay off debt,” the authors note. “If they enter the housing market, student debt holders purchase homes at a price point that may never catch up to their peers through wealth accumulation through housing.”

Lautz and White’s paper suggests several policy steps to take to help mitigate this loss in the homeownership gap. Their recommendations include greater financial literacy to understand the benefits of homeownership and potential wealth gains from it. They also recommend refinancing student loans, expanding mortgage financing through alternative credit scoring models, and raising public awareness of low down payment programs

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Source: Realtor.org

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The effects of the COVID-19 pandemic are widespread, and they’re not just affecting seasoned full-time workers. College students, in particular, are facing a lot of uncertainty — not just in the short-term but potentially for years — or even decades — to come.

Boston Students are having an even harder time paying for college in light of the pandemic and taking on more debt as a result. Even before the pandemic, nearly 2.2 million student loan borrowers had a student loan balance of at least $100,000,

Student job loss

According to research from a Real Estate Witch study, 56% of college students lost a full- or part-time job in 2020 as a result of the pandemic. 

Many students rely on working lots of summer hours — either at a paid internship, full-time job, or taking on more hours at their part-time job — in order to foot the bill for tuition, books, housing and utilities throughout the year. With many of these jobs in service industries such as restaurants, bars, tourism, or retail, many have lost out on this opportunity to stockpile cash for the school year.

Paying for Boston tuition

About 36% of students said a parent lost income as a result of COVID-19, and it directly impacted their ability to pay for college and living expenses. With many parents typically helping out with tuition and the decrease in summer jobs for students, 48% say they are concerned about paying tuition this year.

Although many colleges and universities have opted for online courses to prevent the spread of the virus, this doesn’t usually mean they’re reducing tuition rates: Just 3% of the 100 colleges surveyed planned to decrease their tuition this academic year.

Taking on more debt

As a result, 48% of students are taking out more in loans this year than they did in 2019 — with 33% taking out at least $10,000 more than they did last year. 

Based on a previous student debt survey from Clever, college students are also 21% more likely to carry credit card debt and 33% more likely to have personal loans to help cover expenses this fall than they were in 2019.

At some point, students will need to pay these loans off, and other big-ticket financial purchases will take a backseat — most notably, buying a home. Already, millennials are buying homes later in life than previous generations due in part to their student debt. This problem will only become worse for current college students as a result of taking on even more loans.

Difficulty finding a job after graduation

The pandemic doesn’t only affect college students’ ability to find internships or pay for tuition this year. Their post-college career may also be stunted by high unemployment and a down economy following graduation.

While no one can predict just how long these effects will stick around, for the foreseeable future, there will be more competition for a limited number of positions in the job market — and it may even be from more qualified candidates who were laid off during the pandemic. 

Even after the immediate effects of COVID-19 have subsided, it may take years for companies to feel confident enough in their future outlook to start re-hiring or expanding.

In addition, more than 60% of “entry-level” jobs require at least three years of experience, according to a survey from TalentWorks. Students’ lack of ability to gain relevant experience through internships or jobs in 2020 could hurt them when they enter the job market.

Repayment plans for student loans can be overwhelming and lead many graduates to take advantage of forbearance or deferral plans in order to buy themselves more leniency and time. Unfortunately, this is debt that can follow people well into their adult years, and it can have a significant impact on purchasing power and nearly all major investment decisions. If you’re thinking about buying a Downtown Boston condo for sale but still have student debt, the following are a few important things to consider.

Your Debt-to-Income Ratio

Irrespective of the type of debt that you have, mortgage lenders will want to know that you have sufficient income for both managing your existing debt and managing any new debts that you take on. Many prospective Boston condo buyers find that they have more than adequate income for covering their current bills along with the added costs of condo ownership. Others, however, may find that when ownership costs are considered in full, there is simply not enough disposable income left for maintaining suitable life qualities. If you have student loans, the best way to prime yourself for ownership is by paying as much of your total debt off as possible. This will lower your debt-to-income ratio (DTI) and free up more disposable income for other expenses. A low DTI will also significantly increase your chances of getting a mortgage loan approval.

The Costs of Condo Ownership

When budgeting for the purchase of a Downtown Boston condo, some people make the mistake of assuming that their mortgage loan payments can be counted in place of their current rent. Although the costs of renting and the costs of a mortgage payment can be fairly comparable in some areas and instances, there are other costs of ownership that must be accounted for in your pre-purchase planning and budget. As a condo owner, you will also have to pay fairly substantial Homeowners’ Association (HOA) dues, full utilities, property taxes, mortgage insurance, and condo insurance, making it likely your month-to-month living costs will rise. You must have the job and financial stability for accommodating this increase long-term.

Private Real Estate Advisers

It’s often best to secure the services of a private mortgage adviser. These professionals work directly for prospective buyers and are not affiliated with or compensated by lending institutions. There are no conflicts of interest and there is no pressure to get potential buyers to lock into loans right away. When the time is right, your provider can help you find the best lending institutions and loan options for your circumstances, needs, and short- and long-term financial goals. In the meantime, they can help you take steps to better manage and eliminate your existing debt for a more appealing credit profile and increased disposable income. With their help, you can make the dream of condo ownership a feasible one, even as you work to resolve your student debt.

For more information about buying real estate in Downtown Boston, call 617=720-5454, and schedule an appointment with a trusted local agent.

Difficulty finding a job after graduation

The pandemic doesn’t only affect college students’ ability to find internships or pay for tuition this year. Their post-college career may also be stunted by high unemployment and a down economy following graduation.

While no one can predict just how long these effects will stick around, for the foreseeable future, there will be more competition for a limited number of positions in the job market — and it may even be from more qualified candidates who were laid off during the pandemic. 

Even after the immediate effects of COVID-19 have subsided, it may take years for companies to feel confident enough in their future outlook to start re-hiring or expanding.

In addition, more than 60% of “entry-level” jobs require at least three years of experience, according to a survey from TalentWorks. Students’ lack of ability to gain relevant experience through internships or jobs in 2020 could hurt them when they enter the job market.

How current students can plan ahead for buying a Boston condo

More now than ever, current students should take advantage of any scholarships or grants they can find. The easiest way to get rid of debt in the future is to reduce the number of loans taken out in the first place.

When looking for room and board, students should opt for no-frills housing — now isn’t the time to splurge for apartment complexes that boast of a swimming pool or five-star gym. Those funds can come in handy and are better served toward tuition and books to decrease loans needed and future debt.

How to buy a home with student debt

New graduates can afford a home, but it starts with planning early, settling into a reasonable budget and looking into ways to save. Buyers who are still in student loan debt can seek out a home buyer rebate when they purchase a home or save additional money by working with a discount broker that offers a lower realtor fee.

There are also several types of down payment assistance that may be available to those with student loans, depending on their circumstances. Federal Housing Authority (FHA) loans require as little as 3.5% in a down payment and are available to first-time home buyers. U.S. Department of Agriculture (USDA) loans have even lower down payment requirements — as low as 0% — but are usually only applicable to certain areas of the country. If the buyer or their immediate family has military service, they may also qualify for a Veteran’s Association (VA) loan.

In the long-term, buyers with a lot of student loan debt can work to move all their debt away from credit cards and into monthly payments instead. By focusing on creating manageable monthly payments, borrowers can ensure they make payments on time and keep their credit scores intact.

If you’re a real estate agent working with a buyer who has student debt, you can steer them in that direction or connect them with lenders to help them navigate debt consolidation and pay off any balance if they have a delinquent payment.

Boston Real Estate and the Bottom Line

Millennials and young adults straight out of college were already pushing off buying a home due to heavy debt loads and the 2008 recession, but the COVID-19 pandemic will likely exacerbate the problem as more students take on more student debt. 

Expect more Generation Zers (those born after 1997) to move back in with parents to save up for a down payment, live with roommates to cut down on bills, and maybe even skip the starter home phase altogether. Also, they’ll be looking for smaller homes in the suburbs or even further, where home prices are more affordable.

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