Student-debt relief could improve your chances of getting a mortgage

• Student debt has made it difficult for millennials to save for down payments and get mortgages.
• President Biden's announcement on student-debt relief could make homeownership much more attainable.

Whenever federal student loan borrowers finish celebrating President Joe Biden's cancellation of student debt, many may turn their focus to what they'll do with the extra cash.

For many millennials, the answer might be obvious: buy a home.

That's according to a 2022 National Association of Realtors survey, which asked potential homebuyers about the biggest obstacles preventing them from saving for a down payment and getting a mortgage application accepted.

Among those who said saving for a down payment was the "most difficult task" in the homebuying process, 43% said student loan debt was the expense most responsible for their challenges. A high rent or mortgage payment — also 43%, credit card debt — 33%, and a car loan — 32%, were the other obstacles most cited.

The student debt figure rose to 49% and 44% respectively for respondents aged 23 to 31 and 32 to 41. This cohort largely reflects America's biggest generation — millennials — many of whom are in their prime homebuying years. Student debt relief could be the factor that nudges many to finally pursue homeownership.

"We believe any incremental measures to reduce the approximately $1.7 trillion of cumulative outstanding US student loans, saddling about 45 million borrowers, as a potential catalyst for homeownership and repair and remodel activity," UBS analysts wrote in a note that analyzed the NAR survey.

Last week, Biden announced up to $20,000 in student-loan forgiveness for Pell Grant recipients making under $125,000 a year, and up to $10,000 in relief for other federal borrowers. Coupled with that loan forgiveness was his announcement of his final extension of the student-loan payment pause through December 31 — and both of those relief measures will prove significant, especially in terms of affording homeownership.

Among the oldest millennials — those age 40 or older — 60% own homes, per Apartment List data. At the same point in life, Gen X and Baby Boomers had homeownership rates of 64% and 68% respectively. A majority of millennials already thought homeownership was "out of reach financially" in 2019, and the sky-high housing prices over the last few years haven't helped matters.

But the pause on federal student loan payments has already allowed some Americans to save towards a down payment. And with debt cancellation set to wipe out the balances of up to 20 million borrowers and ease the payment burdens of many others, millennials may soon find that down payment to be in reach.

For those who already have a down payment saved away, student debt relief could be the difference between getting their mortgage application accepted or denied.

Among survey respondents who said their mortgage application had been rejected, 32% cited their debt-income ratio as the reason why. This figure rose to 46% and 41% respectively among Americans in the 23 to 31 and 32 to 41 age groups.

The higher the student debt burden, the less favorable the debt-income ratio — and generally speaking, the less likely one's mortgage application gets approved. Student debt relief would help remove this obstacle for many Americans.

A low credit score — 32% — and income that was unable to be verified — 11% — were also cited as reasons mortgages were denied.

Going forward, prospective homebuyers relieved of student debt should find themselves better positioned to purchase a home. But while the housing market is cooling to some degree, prices remain near record-highs as supply remains constrained — and mortgage rates are higher than they were a year ago.

It remains to be seen when housing prices will ease. But with student debt off their backs, millions of millennials may be finally able to say goodbye to their apartments.