New policy interventions can put homeownership within reach


SAN FRANCISCO and WASHINGTON, Nov. 10, 2022 (GLOBE NEWSWIRE) — The link between student loan debt and homeownership for Black borrowers is complicated by credit histories, debt-to-income ratios and lack of of intergenerational wealth. Yet a number of programs and initiatives targeted at black graduates and other underserved groups may partially offset the historical discrimination these households have faced that have limited opportunities to own a home and create the wealth.

A new comprehensive report from the Racial Equity Accelerator for Home Ownership – a collaboration of Federal Home Loan Bank of San Francisco (FHLBank San Francisco) and the Urban Institute – examines how student loan debt affects homeownership among young black adults and explores ways to reduce the interference of this debt on home ownership.

“The American dream of homeownership should be available to those who pay for college,” said Teresa Bryce Bazemore, president and CEO of FHLBank San Francisco. “Understanding the effects of student loans on mortgages, especially for black graduates who are more likely to be in debt after graduation, will help us bridge the racial divide in homeownership with concrete solutions. We are proud to partner with the Urban Institute to identify systemic changes that will make buying a home fairer.”

The Student Loan Debt and Homeownership for Borrowers of Color report notes that the evidence directly correlating low homeownership rates to student loans is weak. In fact, homeownership rates fell for all racial and ethnic groups between 2000 and 2019, but the declines were steepest for Black and Hispanic households. And student loans figure prominently. The homeownership rate for black households with a head with a bachelor’s degree between the ages of 25 and 40 is 36%, which is lower than the rate for white households with a head without a bachelor’s degree. education, which is 40%.

In a review of 2019 credit bureau data and the Home Mortgage Disclosure Act, the report conservatively found that “3.2% of mortgage applications likely to be declined due to past credit (3.7% in predominantly black neighborhoods) would have been eligible for a mortgage if not for the impact of their student loan on credit history.”

The relationship between student loan debt and mortgages is not linear, as data has shown that most mortgage applicants are turned down due to low credit scores, lack of collateral, and ratios. debt to income (DTI) high. Black student borrowers are likely to have lower credit scores, which are themselves the product of difficulty repaying student loans, but also medical and utility debt. Additionally, black borrowers are more likely to take out larger student loans because their parents are unable to financially support their level of education. This larger debt payment may also affect borrowers’ qualifications for a mortgage.

Black borrowers are subsequently more likely to postpone homeownership due to higher debt loads and lack of down payment support from family. It’s part of a vicious circle where, over generations, black households have had less access to property and therefore less chance to accumulate intergenerational wealth to fund their children’s higher education.

More lenient treatment of student debt could lead to a gradual improvement in the racial homeownership gap between black and white households. Emerging programs provide more flexibility in how student loan debt is reviewed when underwriting mortgages. If student borrowers enroll in income-driven repayment programs and underwriting places less emphasis on student loans, borrowers may experience increased credit scores and more favorable debt-to-income ratios, thus positioning potentially more borrowers for home ownership.

Other programs merge student loan payments with mortgage payments through cash refinancing. This option allows homeowners to tap into the equity in their home to pay off or repay their student loans. But they would first need to have significant equity to benefit from these types of programs. Since black homeowners have, on average, higher loan-to-value ratios, they are less likely to qualify. In some ways, the program may make homeownership more sustainable for student borrowers, but it does not help more student borrowers get homeownership to begin with. Moreover, it would jeopardize any potential forgiveness.

There are also a number of state-funded down payment grants for student loan holders, but these programs can unwittingly widen the homeownership gap. They have requirements, such as high credit scores, that seem more helpful to borrowers who are already ready for a mortgage than borrowers of color who are in debt.

Creating a pathway to a mortgage, especially for black student borrowers, will likely require new types of interventions. These could include simplifying federal student loan repayment programs; better counseling for students before, during and after university; special purpose credit programs that target specific disadvantaged groups; and programs aimed at addressing the underlying multigenerational racial wealth gap.

Raising awareness of how student loans could affect homeownership is paramount, the report notes.

The report also states, “Housing counselors could play an important role in this space. It would be beneficial to give counselors templates to guide borrowers on different student loan repayment options that could help them lower their DTI ratios. or improve their credit scores.Also, earlier education about how student debt affects credit, DTI ratios, and homeownership prospects could help young adults prepare for the mortgage. .”

About Federal Home Loan Bank of San Francisco
The Federal Home Loan Bank of San Francisco is a member-driven cooperative that helps local lenders in Arizona, California and Nevada build strong communities, create opportunity and change lives for the better. The tools and resources we provide to our member financial institutions (commercial banks, credit unions, industrial loan companies, savings banks, insurance companies and community development financial institutions) promote home ownership, expand access to quality housing, start or support small businesses, and revitalize entire neighborhoods. Together with our members and other partners, we make the communities we serve more vibrant, equitable and resilient.

About the Urban Institute
The nonprofit Urban Institute is a leading research organization dedicated to developing evidence-based ideas that improve people’s lives and strengthen communities. For 50 years, Urban has been the trusted source for rigorous analysis of complex social and economic issues; strategic advice to policy makers, philanthropists and practitioners; and promising new ideas that expand opportunities for all. Our work inspires effective decisions that advance equity and improve the well-being of people and places.


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