Living with credit

Gen. Y to Congress: We can’t get approved for home loans

Kelly Dilworth

Five years after the Great Recession formally ended, a record number of millennials are continuing to put off homeownership, according to research released earlier this year by the U.S. Census Bureau.

It’s not just that the millennial generation, also known as Gen Y, have a vague feeling they can’t afford it. Lenders tell them so by turning down their loan applications. Many 20- and 30-somethings’ debt-to-income ratios are so high that many can’t get approved for a home loan if they try.

Gen. Y to Congress: We can't get home loans

“It used to be that if you had student loan debt, you were more likely to own a home,” remarked Rory O’Sullivan, a 2006 graduate of Pomona College and deputy director of the Young Invincibles, at a hearing Wednesday on Capitol Hill. “That, the Federal Reserve recently showed, has now switched.” A 30-year-old with student debt is now less likely to own a home than a 30-year-old without student debt, according to data from the New York Federal Reserve.

According to Emma Kallaway, executive director of the Oregon Student Association and a 2010 graduate of the University of Oregon, part of the problem is that students are still graduating into an awful job market and their subsequent incomes are so low, compared to the amount of debt they had to take out to graduate, that lenders won’t consider them. Lenders typically evaluate a borrower’s debt-to-income ratio — which compares how much you make to how much you owe — when deciding whether to extend a loan.

Testifying at the Senate Banking Committee’s June 25 hearing, “Dreams Deferred: Young Workers and Recent Graduates in the U.S. Economy,” Kallaway related her own experience with getting rejected for a home loan through a Portland, Ore.-based lending program for women because of her student loan debt. “I have good enough credit. I have a little savings. I have minimal expenses. I am low income and I don’t have credit card debt. I went through the whole process and I was told I was an ideal candidate for these programs, but my debt to income ratio each month is too high,” said Kallaway. “My student loans are my only debt. I have to pay rent each month when I could be paying off a small condo and creating security for my future, but my student loans keep me from that opportunity.”

Bad economy, surging costs
According to Kallaway and O’Sullivan, state cutbacks in public university funding have left millennials footing the bill. With budgets cut, universities have jacked up tuition and other college costs, forcing students to take out bigger loans to get through school. “More affordable education upfront is what’s right,” said Kallaway. But there are few signs that college costs will shrink any time soon.

Meanwhile, the U.S. economy still hasn’t fully recovered from the Great Recession and many young people are making far less money overall than previous generations did at the same age. That, in turn, is making the student debt crisis even worse because many young people either can’t afford to repay their loans — or they’re cut off from taking out other loans, such as mortgages, because their incomes are too low.

“The wages of all groups of young graduates have fared extremely poorly during the Great Recession and its aftermath,” testified Dr. Heidi Shierholz, an economist at the Economic Policy Institute, at the hearing. When adjusted for inflation, real wages since 2007 have dropped 9.8 percent for young high school graduates, and 6.9 percent for young college graduates.

A separate report released June 26 by the Harvard Joint Center for Housing Studies predicted that homeownership among millennials is likely to surge over the next decade as they get older and the economy continues to slowly improve.

But experts agree that many young people — especially those with student debt — may continue to have a hard time financing their own homes until the job market substantially improves.

“Keep in mind that these are symptoms of a disease,” remarked Dr. Keith Hall, Senior Research Fellow at George Mason University, at Wednesday’s hearing. “The disease itself is a lack of job growth. Until you solve this labor problem, this won’t go away.”

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  • Scott

    On a positive note – they’re allowing you not to get into further debt that you couldn’t pay. Look at all the people who got mortgages and knew they couldn’t pay it. Or, unfortunately had a lot of income.
    I just imagine – will I be able to pay the mortgage loan, utilities, taxes, yard work, and pay the bills I have if I lose my job? I know my debt to income is lower than many, but I like to be cautiously optimistic while getting more into debt.
    Thanks, Kelly, for the article.

  • Dirk

    Good point Scott, also a student who rents and defaults can always move to cheaper accommodation or back home, whereas an owner can face foreclosure and bad credit ratings.