MONEY credit cards

A Good Credit Score Isn’t Enough to Get You a Loan

Getty Images/David Young-Wolff

Not even a stellar credit rating can make up for these big no-nos

When it comes to getting loans, having good credit is crucial. A good credit score shows potential lenders that you’re a reliable consumer who pays bills on time and keeps your debt balances at a reasonably low level, so they have good reason to believe you’ll do the same if they extend you credit.

While a great credit score will carry you far in a loan or credit card application, you can’t rely on good credit alone. There are a few situations in which you still might not get a loan or credit card you apply for, even though you have good or excellent credit.

1. If You Don’t Have Enough Income

You don’t necessarily need to have a job to get a loan or credit card, but you generally have to show some sort of ability to repay, whether that’s claiming household income, getting a co-signer or something else. Even if you have income, the lender may determine it isn’t enough to grant you approval for the loan you’re requesting.

The more you’re requesting to borrow, the more your income matters. With credit cards, that information is factored into how high your credit limit will be. If you’re applying for a mortgage, you have to meticulously document your income and get transcripts from the IRS backing that up as part of the loan-application process. Even if you have a good credit history, the main thing that may hold you back from getting a loan is your income.

2. If You Have Too Much Debt

Having too much debt can negatively affect your chances at getting a loan, particularly if you’re applying for a mortgage. When calculating your ability to repay, mortgage lenders look at your debt obligations, including child support, alimony and tax debt, and they subtract that from your income. In some cases, you may have great credit and a high income level, but you have too many debt obligations to take on another loan.

3. If You Already Have a Lot of Unused Credit

Having a lot of unused available credit is good for your credit utilization rate, which has a large impact on your credit score, but in some cases, that’s not something lenders like to see. If a lender sees you have a large amount of available credit when he or she reviews your credit report, it may be cause for rejecting your request for a loan.

Before applying for any new credit, you need to have a good understanding of your finances and what makes up your credit standing. You can do that by regularly reviewing your free annual credit reports, but you can also do more frequent credit checkups.

More From Credit.com

MONEY Debt

Millennials Aren’t Buying Homes, but Not for the Reason You Think

couple looking at house
Troels Graugaard—Getty Images

As student debt has exploded, young consumers are taking out fewer mortgages and auto loans. But are student loans really to blame?

There’s a familiar narrative that the burden of student loans is forcing young borrowers out of the auto and housing markets, crippling their ability to take the same financial steps into adulthood as previous generations.

Think again. A new study from TransUnion says that fears about how much student loan obligations are hindering young borrowers are overblown.

The study looked at consumers aged 18 to 29 who had student loans alongside those who did not, grouped by age and credit score, then tracked their performance on other types of loans in the two years after they started paying off their student debt.

The bottom line: While student loans are way up since the end of the recession, the study found no evidence that such loans are causing young adults to stop opening credit cards, buying new cars, or applying for mortgages. Sure, today’s millennials are doing less of all three than 20- to 29-year-olds did a decade ago—but that’s true whether they’re paying off student loans or not.

According to TransUnion data, the percentage of consumers in their 20s with student debt has jumped from 32% in 2005 to 52% in 2014. The share of student loans in relation to other debt held by young consumers has skyrocketed, too, increasing from 12.9% to 36.8% over the past decade. At the same time, their share of mortgage debt dropped from 63.2% to 42.9%.

But current conventional wisdom about the ripple effect of student debt on other types of borrowing is correlation, not causation, says Charlie Wise, vice president of TransUnion’s Innovative Solutions Group and co-author of the study.

“What we’re trying to do here is cut through the hype and say, ‘what’s the reality?’” Wise says.

The study tracked groups entering repayment at three different times—2005, 2009, and 2012—in an attempt to determine whether performance differed before the recession, immediately following the recession, and more recently as the economy has recovered.

In 2005, a smaller percentage of consumers with student debt had auto loans or mortgages relative to their peers without student loans. But after two years the gap narrowed, and in the case of auto loans, disappeared.

A similar pattern exists for the 2009 and 2012 groups, suggesting that borrowing trends in which individuals with student debt catch up to their peers over a period of a few years have remained steady.

So if student loan debt isn’t causing mortgage and auto loan participation to drop, what is?

Wise points out that about 50% of people aged 18 to 29 have credit scores that qualify them as nonprime borrowers—a percentage that has also held steady since 2005. What has changed, he says, is lending standards, which became stricter in the aftermath of the recession.

The study also shows that young consumers with student debt actually performed slightly better on their new accounts than their peers without student loans.

For example, consumers who started repaying their student loans at the end of 2012 had a 60-day delinquency rate on new auto loans that was 15% lower by the end of 2014 than their peers without a student loan.

The report counters research from a year ago by the Federal Reserve Bank of New York that found home ownership rates dropped more quickly among people aged 27 to 30 who had student debts compared with those who didn’t.

But TransUnion’s findings don’t come entirely out of the blue. A recent Wall Street Journal analysis of data from LoanDepot.com found that loan applicants with student loans aren’t any more likely than those without debt to be turned down for first-time home loans.

And some economists, such as Beth Akers, a fellow at Brookings Institute’s Brown Center of Education Policy, have pointed out that lower participation in the housing market among individuals with student debt is within the historical norm.

Akers says TransUnion’s report that student debt isn’t dooming young borrowers isn’t particularly surprising. “Given the fact that financial returns on investment for higher education are positive and large, the notion that debt is harmful to students is a little puzzling,” she says.

Getting clear answers to the question of how debt affects individuals is challenging, though.

Akers points out that you can’t randomly assign debt to people, and since there are significant differences between the backgrounds and demographics of households with student debt and those without, you can’t expect their behaviors around buying homes or cars to be the same.

Student loan debt may not be overburdening young consumers on a macroeconomic level, she says, but what’s still unknown is the emotional and social cost of carrying such debt.

TransUnion’s Wise describes the study’s findings as encouraging news. For soon-to-be college graduates, there’s evidence that they can stay above water with their loans, and for lenders, there are “credit hungry” millennials who are able to keep up with payments.

Wise’s major takeaway for both groups: don’t despair.

 

More on Managing Student Debt:

The 25 Most Affordable Colleges from MONEY’s Best Colleges
Why You Might Want to Take Student Loans Before Using Up College Savings
8 Ways to Stop Student Loans From Ruining Your Life

MONEY Credit Scores

The One Graph That Explains Why a Good FICO Score Matters for Homebuyers

young couple outside of home
Ann Marie Kurtz—Getty Images

An analysis from an economic policy group estimates that tight credit standards may have prevented 4 million consumers from getting mortgages since 2009.

When it comes to buying a home, there’s a lot more to the process than just finding an affordable home for sale and having enough money for a down payment. Most people need loans to finance such a large purchase, but even as the housing market has rebounded from the foreclosure crisis and low property values of 2010, mortgages remain very difficult to acquire. A report from the Urban Institute, a Washington-based economic-policy research group, concludes that 1.25 million more mortgages could have been made in 2013 on the basis of conservative lending standards practiced in 2001, years before the housing bubble began to inflate.

Whether or not a lender approves a borrower for a mortgage depends on several factors, like income and outstanding debt, but looking at the credit scores of mortgage borrowers during the last several years shows just how tight the market has been post-recession. Here’s how it breaks down.

Urban-Institute-FICO-Score-distribution

The Urban Institute estimates that the stringent credit score standards for mortgage origination resulted in 4 million mortgages that could have been made (but weren’t) between 2009 and 2013. From 2001 to 2013, consumers with a FICO credit score higher than 720 made up an increasingly large portion of borrowers, from 44% of loans in 2001 to 62% in 2013. Consumers with scores lower than 660 made up 11% of borrowers in 2013, but they represented 28% of home loans in 2001.

The study authors note that their calculations do not account for a potential decline in sales because consumers may not see homeownership as attractive as it had been before the crisis.

“Even so, it is inconceivable that a decline in demand could explain a 76% drop in borrowers with FICO scores below 660, but only a 9% drop in borrowers with scores above 720,” the report says.

On top of that, the authors found that tightened credit standards disproportionately affected Hispanic and African-American consumers. In comparison to loan originations made in 2001, new mortgages among white borrowers declined 31% by the 2009-2013 period, 38% for Hispanic borrowers and 50% for African-American borrowers. Loans to Asian families increased by 8%.

Millions of Americans are still feeling the impact of the economic downturn on their credit scores, because negative information like foreclosure, bankruptcy and collection accounts remain on credit reports for several years. Rebuilding the credit and assets necessary to buy a home takes time, particularly in such a tight lending climate, but by regularly checking your credit — which you can do for free on Credit.com — and focusing on things like keeping debt levels low and making loan payments on time, you can start making your way toward a better credit standing.

More from Credit.com

This article originally appeared on Credit.com.

MONEY loans

How to Know How Much Loan You Can Handle

hands holding house made of money
Deborah Harrison—Getty Images

Before you agree to those loan terms, be sure you know what repaying it will do to your accounts.

It’s not uncommon to find yourself in need of a loan to pay for a home, car or other major expense. But navigating the world of lending can be a bit bewildering.

If you’re careful and sensible, it’s possible to borrow money without risking your financial well being. In fact, responsible borrowing can be an integral part of wealth-building. The key is to know how much loan you can actually handle easily. But, how do you determine this?

Know Your Credit Score

Your FICO credit score will play an enormous role in the size of the loan you can qualify for and the interest rate that you will pay. The higher the score, the better off you’ll be. Everyone is entitled to one free credit report each year through annualcreditreport.com, so be sure to examine it if you’re considering taking out a loan. A credit score above 720 usually qualifies you for good rates. Anything less than that, and you may want to consider taking steps to improve your score before borrowing. This means correcting any errors and paying down outstanding debts.

Learn About Debt-to-Income Ratios

The general rule of thumb regarding mortgage loans is to avoid dedicating more than 28% of your monthly take-home income to housing. This includes not just the mortgage payments, but also related taxes and fees, which can add another 2%-3% to the overall cost. So in other words, a person taking home $50,000 should avoid paying more than $1,166 per month toward their home. ($50,000 x 0.28 = about $1,166).

There’s another key factor, however, and that is your overall debt load. The 28% rule above applies to the mortgage loan itself, but financial experts advise having an overall debt-to-income ratio of no more than 36%. So if you already have other loans, you may want to take on a smaller mortgage, or paying them down before borrowing more.

What You’re Approved For Is Not Necessarily What You Should Borrow

When you apply for a loan, a lender will usually let you know how much you are approved to borrow. It’s best to ignore that number. Just because you are approved to borrow $500,000 for a home does not mean it’s wise to go and borrow $500,000. It’s nice to get approval, but banks found themselves in trouble a few years ago when they approved loans for amounts that were well beyond what the borrowers could comfortably afford.

Down Payments Are Key

If you can’t afford to buy a house or other big purchase in cash, at least put down as much money as you can. This will reduce the size of the loan and the amount of interest you will pay. A larger down payment could also make you more attractive to lenders, who can offer a more generous interest rate. When buying a home, a down payment of 20% or more will usually mean you can avoid paying for mortgage insurance.

Look at Loan Length, Not Just Monthly Payments

All too often, borrowers will focus on the monthly payments without looking at the total cost of a loan. The great car buying advice site Edmunds.com advises to keep loan terms to no more than five years, and reports that two additional years on a loan of a Honda Accord would add more than $3,400 in interest charges. Similarly, a 15-year mortgage on a home will save you tens of thousands of dollars over a 30-year term, even if your monthly payments are higher.

Future Income Is Not Guaranteed

I once heard a friend say that they planned to purchase a more expensive home than they could really afford, because they figured they’d be earning more down the road. This is a very risky approach to borrowing. A more sensible approach is to borrow based on your current financial situation, then any extra income you earn over time can go into savings or be used to pay off the debt earlier.

Don’t Steal From Your Future Self

Are you putting away money toward retirement? Would a mortgage payment or other loan prevent you from contributing to an IRA or 401(k)? If you’re making loan payments but are unable to set aside money for the future, then you may be borrowing too much. Set aside 10%-15% of your salary for retirement before seriously considering large loans.

Consider Future Expenses

A couple with no children might crunch some numbers and determine that they can comfortably afford a loan of a certain size, but will their monthly expenses always be what they are now? It’s important when borrowing to try and anticipate future costs, especially when exploring a long-term loan. A good rule of thumb is to assume that your costs will rise yearly with inflation (roughly 2%-3% a year; add more if you expect a larger family, or a move to a more expensive area.)

Read more articles from Wise Bread:

5 Loan Options for Those With Good Credit
Worried About Debt? Tips On Managing Your Loans
5 Strategies To Wipe Out Your Credit Card Balance

MONEY Credit

5 Ways You’re Accidentally Wrecking Your Credit

pieces of credit card in hands
Roy Hsu—Getty Images

Certain actions, like closing a high-fee credit card, might seem financially savvy. But there could be consequences for your credit.

It’s one thing to knowingly make decisions that hurt your credit score. We’ve all been there, and sometimes tough decisions must be made. But it’s an entirely different situation to accidentally wreck your credit.

In some cases, we make decisions without realizing the impact on our credit. In other cases we may know that certain decisions can hurt our score, but we don’t appreciate the severity of the impact. Either way, maintaining good credit requires more than casual attention.

It is entirely possible that you could be accidentally wrecking your credit, and here are some of the ways that you could be doing just that.

1. Not Paying Attention to Your Credit Balances

Good credit is about more than just paying bills on time. About 30% of your credit score is based on your amount of debt, which includes your credit utilization. That’s the ratio of how much you owe on your credit lines divided by the total credit limit of those lines. For example, if you have total credit lines of $40,000, and you have a total outstanding balance of $10,000, your credit utilization ratio is 25% ($10,000 divided by $40,000).

If that ratio exceeds 30%, it can have a negative impact on your credit score. If you are casual about your credit balances, they can slowly creep up to 40%, 50%, 60% or more. At that point, you may see your credit scores begin to sink.

2. Closing Accounts

A lot of people make it a habit of closing out any credit cards that they pay off. From a credit perspective, however, this can have a negative impact. Though it seems counter-intuitive, a paid in full line of credit or credit card is a positive contributor to your credit score, even if you stopped using the account.

This brings us back to credit utilization. If you pay off a credit card that has a line of $5,000, that available credit is contributing to the total amount of credit you have available. That will improve your credit utilization ratio. Closing the card will lower your available credit, increase your overall credit utilization, and potentially lower your credit score.

3. Co-Signing Loans

Co-signing loans is another area where people are often very casual. They often assume that they are just doing a good deed to help a friend or family member, and may even mistakenly believe that it’s simply a one-time event.

But when you co-sign a loan, you will be involved in that loan and that loan will be on your credit report until it is fully paid. In the event that the primary borrower makes a late payment, this will have an impact on your credit score. Worse, should the loan go into default, this will also show up on your credit.

4. Applying for Too Many Lines of Credit

If you have good credit, it’s likely that you are getting bombarded with credit offers in the mail on a weekly basis. If you are in the habit of applying for the better ones every month or so, you could be unknowingly hurting your credit.

Credit inquiries account for 10% of your overall credit score. While this is the least significant factor, these hard pulls — as they are called — can ding your credit. Consider the impact these inquiries can have the next time you consider a 0% credit card offer or bonus miles sign-up deal.

5. Not Monitoring Your Credit Scores

One of the best ways to know if you are hurting your credit is by monitoring your credit scores. Credit scores change on at least a monthly basis, but typically stay within a tight range. A significant drop in your scores, say more than 25 or 30 points, is an indication that something is wrong. You won’t know about the drop, however, unless you are paying attention to your credit scores on a regular basis.

A significant drop in your score could be an indication that your credit utilization ratio is getting too high. It can also indicate an unsuspected late payment. Errors are also possible when it comes to credit. And at the extreme, a big drop in your credit score could be an indication that you are the victim of identity theft.

You won’t know any of these unless you are monitoring your credit scores on a regular basis. Unfortunately, ignorance is not bliss when it comes to your credit. You shouldn’t obsess about it, but at the same time, you should never be too casual about it, either. Bad things can happen when you’re not paying attention.

Fortunately, there are a number of ways to obtain and monitor your score for free, including through Credit.com.

More from Credit.com

This article originally appeared on Credit.com.

MONEY Banking

How Lending Club Could Save Community Banks

But their strategy doesn't come without risk.

A consortium of community banks believes it has found a way to compete with their larger peers in the market for consumer loans, a business that has come to be dominated by too-big-to-fail lenders like Bank of America, Wells Fargo, and JPMorgan Chase.

On Monday, BancAlliance, a network of nearly 200 community banks, announced that its members will use LendingClub LENDINGCLUB LC 2.96% , a newly public company that operates an online lending platform, to construct portfolios of consumer loans.

Here’s how The Wall Street Journal, which broke the story at the beginning of this week, explains it:

Members of BancAlliance […] will start using Lending Club, a website that facilitates loans to individuals, to build new portfolios of consumer loans. The banks will each commit to buy a certain amount of loans from Lending Club, which will vet borrowers for their ability to repay. The borrowers will come either from the bank’s own customers, whom the bank will send to a Lending Club website, or other borrowers that come directly to Lending Club.

The banks are expected to buy unsecured loans of less than $35,000 without requiring collateral. Until now, small banks generally haven’t been able to justify the cost of underwriting those loans because big banks can do so much more efficiently.

It’s hard to deny that this is a smart way for community banks to level the playing field in an increasingly concentrated industry.

Since the mid-1990s, the country’s smallest banks have been supplanted as the major source of consumer lending. This is the result of mergers and acquisitions that have created a top-heavy industry dominated by a handful of massive banks. And along with size, at least in theory, comes economies of scale, which make it nearly impossible for small banks to compete against a multitrillion-dollar giant like Bank of America.

Thus, by banding together to syndicate larger loans through Lending Club’s credit platform, BancAlliance is addressing the issue head-on.

But it’s important to note that this strategy doesn’t come without risk. One of the lessons history teaches us about banking is that outsourcing credit decisions can lead to disaster. There are numerous examples of this, but two from the recent past stand out from the rest.

In the early 1980s, some of the nation’s biggest banks outsourced the origination of oil and gas loans to Penn Square Bank, an Oklahoma City-based lender that specialized in the energy industry. It wasn’t until after the syndicated loans began defaulting that the correspondent lenders, including Chicago’s Continental Illinois Bank and Seattle’s Seafirst Bank, learned they had been shoddily originated and lacked proper documentation. In the fallout, Continental Illinois, the nation’s seventh biggest bank at the time, was seized by regulators while Seafirst had to be rescued by Bank of America.

Virtually the same thing happened in the financial crisis of 2008-2009. In that case, mortgage originators like Countrywide Financial and Ameriquest underwrote billions of dollars in toxic sub-prime home loans that were then sold to bigger banks as well as to Fannie Mae and Freddie Mac. It was largely these loans, in turn, that went on to cost many of the nation’s biggest banks tens of billions of dollars in credit losses and elevated legal costs.

This is why JPMorgan CEO Jamie Dimon said that the decision to use mortgage brokers was the “biggest mistake of his career.” It’s why Bank of America has since shuttered its correspondent mortgage operations altogether. And it’s the reason many other leading lenders — including Citigroup, MetLife, and Ally Financial — have all reduced their reliance on third-party loan originators.

What makes the present case even more suspect is Lending Club’s, at least in my opinion, cavalier attitude toward credit risk. The company purports to offer borrowers a “convenient, simple, and fast online application that improves the often time-consuming and frustrating loan application process.” But here’s the thing: there’s a reason the credit application process takes time. Determining a borrower’s creditworthiness isn’t only about running a sophisticated algorithm. It’s also about assessing the character of perspective borrowers. And that takes time.

Along these same lines, here’s how Lending Club pitches its services to potential credit providers: “We use proprietary credit decisioning and scoring models and extensive historical loan performance data to provide investors with tools to construct loan portfolios confidently and model targeted returns.” While this too sounds great, it evidences a level of confidence that isn’t warranted by Lending Club’s experience.

For instance, consider these findings from the FDIC about the prevalence of failures in the 1980s and 1990s among the then-most recently chartered banks and thrifts:

  • “Banks chartered in the 1980s and mutual institutions converting to the stock form of ownership failed with greater frequency than comparable banks.”
  • “Of all the institutions chartered in 1980-90, 16.2 percent failed through 1994, compared with a 7.6 percent failure rate for banks that were already in existence on December 31, 1979.”
  • “Although the data are dominated by the Texas experience, in most areas banks chartered in the 1980s generally had a higher failure rate than banks existing at the beginning of the 1980s.”

It’s worth noting as well that this isn’t the first time we’ve heard predictions about the ability to reduce credit risk. Most recently, in the years before the crisis of 2008-2009, lenders thought that credit default swaps, financial derivatives developed by JPMorgan in the 1990s, had effectively freed banks from the centuries-old menace. But in reality, swaps had merely substituted counterparty risk in the place of credit risk. You’d be excused, in other words, for harboring suspicions about claims that someone can “construct loan portfolios confidently and model targeted returns” (emphasis mine).

The net result is that BancAlliance’s strategy, while promising on its face, certainly isn’t a guaranteed panacea. Its success depends on Lending Club’s ability to consistently originate high-quality consumer loans through all stages of the credit cycle. Will the upstart lending platform be able to meet this challenge? That remains to be seen, but it should be watched closely in the meantime.

MONEY mortgages

Half of Home Buyers Make This $21,000 Mistake

rows of model houses
Jonathan Kitchen—Getty Images

47% of buyers aren't comparison shopping for a mortgage, and it's costing them tens of thousands of dollars.

When it comes to purchasing a home, most buyers generally don’t have trouble comparison shopping. According to a recent study, 22% of house hunters even described themselves “addicted” to online listings. But while home buyers love shopping for homes, they aren’t doing the same with mortgages. And it’s costing them tens of thousands of dollars.

A new report from the Consumer Financial Protection Bureau shows that 47% of home buyers seriously considered only a single lender or broker before deciding where to apply for a mortgage. And 77% of buyers only applied with one lender or broker instead of applying with multiple lenders and selecting the best offer.

Granted, shopping for a mortgage isn’t nearly as fun as shopping for a house, but rushing this part of the process can cost consumers an enormous amount of money. The bureau’s research showed that a borrower looking for a conventional 30-year fixed rate loan could be offered rates that differ by more than half a percent. According to BankRate’s mortgage payment calculator, the difference between a 4% and 4.5% interest rate for a conventional 30-year fixed-rate mortgage of $200,000 is slightly more than $21,000 over the lifetime of a loan. Put another way, comparison shopping for a mortgage can save you enough money to buy a second car.

Why don’t most buyers make the effort? Aside from the obvious—comparing financial instruments isn’t exactly a day at the beach—the CFPB found that being informed has a lot to do with consumer behavior. Borrowers who felt confident about their knowledge of available interest rates were nearly twice as likely to comparison shop as those who were unfamiliar with the interest rates they could expect to receive.

To solve that problem, the bureau has created a website to educate prospective buyers on the home purchasing process. Among other tools, it offers a page that lets consumers check interest rates for their particular situation using their location, credit score, down payment, and other factors.

For more answers to your mortgage questions, check out our Money 101 on home-buying:
What mortgage is right for me?
How do I get the best rate on a mortgage?
What will my closing costs be?

MONEY Student Loans

Don’t Believe the Hype: There’s Still a Student Loan Crisis

piggy bank on stack of books
Fotolia—AP

When it comes to student debt, it's not fair to blame students for being in over their heads.

The Brown Center on Education Policy at the Brookings Institution is on a mission.

Over the past several months, the center’s researchers have been working hard to reset popular perceptions about the existence of a student loan crisis and, perhaps, influence public policy as a result.

In the first of its reports (April 2014), the BCEP concluded that not only is the price tag for governmental student loan relief programs much higher than originally thought, but their existence presents an irresistible temptation for students to “engage in more risky behavior because they don’t have to bear the full cost of their actions.”

As such, the center urges policymakers to eliminate the forgiveness portions of the various relief programs to “reduce the potential for over-borrowing by requiring borrowers to eventually pay off their debt.” Doing so, the center’s researchers argue, would also dissuade low-income borrowers—whom they view as disproportionately benefiting from these programs—from attending high-priced schools.

In a follow-up report (June), the same researchers take this a step further by contending that broad-based policy actions on the part of the federal government are “likely to be unnecessary and are wasteful given the lack of evidence of wide-spread hardship”—a conclusion they base upon creative manipulations of Federal Reserve Bank of New York data and selective interpretations of macroeconomic factors and trends.

Three months later (September), the center published an update, in which the researchers turn up the heat by directly challenging what they characterize as the “often-hysterical public debate about student loan debt.” Selective FRBNY data is once again used, this time to bolster a contention that “households with education debt today are still no worse off than their counterparts were more than 20 years ago,”—a conclusion that’s based, in part, on halving the value of those loans on the dubious presumption that U.S. households are typically made up of two people who would be equally responsible for their repayment.

Most recently (December), the BCEP published what may be the capstone to the previous three reports. Its researchers found that more than half of all first-year college students seriously underestimate the extent of their education-related borrowing, which “may perpetuate popular narratives about crushing student loan burdens.” They also contend that after taking into account inflation and financial aid, “college is more expensive, but not to the extent it appears at first glance.”

As it happens, this latest view reinforces their previously articulated “unnecessary and wasteful” conclusion with regard to loan-relief programs, not least because “without knowledge of their financial circumstances, a student with a large sum of debt might be unprepared to compete for the jobs that would pay generously enough to allow them to repay their debt without having to enter an income-based repayment program.”

So to sum up the narrative the BCEP has evolved on this contentious subject, borrowers today are no worse off than those of the immediately preceding generation; tuition prices aren’t so out of whack as we’ve been led to believe; and not only are the government’s relief programs extravagant and pointless, but they also present a moral hazard.

In other words, to the extent that today’s students find themselves in over their heads, it’s their own fault!

Well, we are all certainly entitled to our own opinions. And from the hundreds of comments that are posted on articles discussing student loans, it appears that many agree with the BCEP’s conclusions—especially those who worked their way through school and repaid all their education debts over time, like me.

But that doesn’t mean that the Brookings’ point of view should go unchallenged, particularly when there is more information to consider.

Take for example, the fact that over the past 20 years, average higher-education prices have consistently outpaced the rate of inflation, average student borrowing has more than doubled, average aggregate borrowings have more than quadrupled, college-completion rates remain stuck at just north of 50%—and that’s for students who take six years to complete a four-year degree—and less than half of all loan payments are being remitted in accordance with the original terms of the underlying agreements (which means that more than half of all student loans that are currently in repayment are either delinquent or in default, have been granted temporary forbearance or were permanently restructured to facilitate repayment).

If the Brookings Institution is serious about providing “innovative, practical recommendations” that “foster the economic and social welfare, security and opportunity of all Americans,” not only would its researchers objectively incorporate all the available data, but their reports would also critically assess the personal-financial management implications of the higher-education industry’s revenue-based business model, the government’s easy-credit policies and the private sector’s loan-underwriting practices, which value creditworthy cosigners and the virtual impossibility of discharge in bankruptcy court over a borrower’s ability to repay his obligation.

As important, the institution would also vigorously explore the reasons for what is clearly an abject failure of financial-literacy education in secondary education and within college financial-aid offices that helped bring us to this miserable juncture.

This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.

More from Credit.com

This article originally appeared on Credit.com.

MONEY mortgages

Here Come Cheap Mortgages for Millennials. Should We Worry?

young couple admiring their new home
Justin Horrocks—Getty Images

The federal agencies that guarantee most mortgages are launching new loan programs that require only 3% down payments for first-time buyers. Is this the start of financial crisis redux?  

According to new research from Trulia, in metro areas teeming with millennials, such as Austin, Honolulu, New York, and San Diego, more than two-thirds of the homes for sale are out of reach for the typical millennial household.

That goes a long way to explaining why first-time homebuyers have recently accounted for about one-third of homes sales, according to the National Association of Realtors, down from a historic norm of about 40%. And it should concern you even if you’re not a millennial or related to one: A shortage of first-time buyers makes it harder for households that want to trade up to find potential buyers; and spending by homeowners for homes and housing-related services accounts for about 15% of GDP.

Now the federal government appears intent on reversing the trend — or at least on easing the pain of the still-sluggish housing industry.

Trulia’s dire analysis assumes that buyers need to make a 20% down payment — a high hurdle for anyone, let along a younger adult. But Fannie Mae and Freddie Mac, the government agencies that guarantee the vast majority of mortgages, this week launched new loan options that will require down payments of as little as 3% for first-time buyers (and, in limited instances, refinancers as well). Fannie’s program will be live next week; Freddie’s, which will be available to repeat buyers as well, will launch in early spring.

Before you get all “Isn’t that the sort of lax standard that fueled the financial crisis!?”, it’s important to realize significant differences between now and then.

The only deals that will qualify for the 3%-down programs are plain-vanilla 30-year fixed-rate loans. No adjustable-rate deals, no teaser-rate come-ons, and, lordy, no interest-only payment options. And flippers are not welcome; the home must be the borrower’s principal residence.

Both Fannie Mae’s MyCommunityMortgage and Freddie Mac’s Home Possible Mortgage program are aimed at moderate-income households. For example, to qualify for Fannie Mae’s program, household income must typically be below the area median. Income limits are relaxed a bit in some high cost areas, such as the State of California (up to 140% of the local median) and pricey counties in New York (165% of the median).

That said, lenders will be allowed to extend these loans to borrowers with credit scores as low as 620. That’s even lower than the average 661 FICO credit score for Federal Housing Administration-insured loan applications that were turned down in October, according to mortgage data firm Ellie Mae. (The average FICO credit score for FHA approved loans was 683.)

Like FHA-insured loans, the new 3% mortgages offered by Fannie and Freddie will require home buyers have private mortgage insurance (PMI). That can add significantly to mortgage costs.

For example, a $300,000 home purchased with a 3.5% fixed rate loan and a 3% down payment would have monthly principal and interest charges of about $1,300 a month. The PMI adds another $240 or so to the monthly cost; that’s nearly 20% of the base monthly mortgage amount. (You can estimate the bite of PMI using Zillow’s Mortgage Calculator.)

But one significant advantage the new Fannie/Freddie loan programs have over the FHA program is that they will allow homeowners to cancel their PMI once their home equity reaches at least 20%. Beginning in 2013, the annual insurance charge on FHA-insured loans, currently 1.35% of the loan balance, can never be cancelled regardless of whether the borrower has more than 20% equity.

 

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