Building Bigger With Bigger Debt

The developing trend in new house building is bigger homes. You might mistakenly assume that as the population grows older, seniors would be downsizing. You might also assume that the first time buyers market is demanding smaller homes. But that doesn't appear to be the case for either according to the National Association of Home Builders. Both want bigger homes.

Since 2000, the typical American home averaged around 1,800 square feet but today builders are finding the biggest demand to be up around 2,200 square feet and buyers want more bathrooms. The statistics don't share how many bathrooms are being built but they do indicate that almost every individual in the home wants their own bathroom for privacy.

For builders, this is becoming a boom because they are able to charge a larger selling price for each house built.

Is it Student Debt?

How student debt is affecting the housing market seems to be a mixed question. Some analysts think student debt is holding back first time buyers, especially those with more than $50,000 in outstanding loans. However, a recent study by Zillow found differently. It found that those with a Bachelor Degree or higher understood the importance of home ownership and that it was much smarter than paying the high rents that dominate today's marketplace.

Education does play an important role in the decision to buy a house. Today, according to lenders, those with a Bachelor Degree make an average of $65,000 per year. Those with an Associate Degree average about $50,000. Because of the higher income potential, lenders are more willing to make loans to those with a Bachelor Degree with up to a limit of about a $50,000 of outstanding student loans based on their ability to meet both loan obligations.

However, those with an Associate Degree were only able to qualify for a loan 75 percent of the time even if they had no student loans. For those with an Associate Degree and up to $50,000 in student debt, the percentage qualifying for a mortgage dropped to about 60 percent.

It's All a Formula

Lenders differ slightly but for the most part, it's all a formula. Of course, there are many financial factors that go into this formula but among the most important are your principal, taxes, insurance, and interest payments (PITI). Along with your credit score. For instance, if you are young and have a starting income of about $50,000 a year, your monthly income will be a bout $4,166 before income taxes and other withholdings. If your PITI comes to $1,200 a month, it means you'll have a mortgage to debt ratio of 28 percent. Most lenders will allow a mortgage at this rate and some all the way up to 36 percent. However, the FHA (as of 2015) limited this ratio to 31 percent.

Keep in mind this doesn't include any other debt that you might have. Student loan debt has to be added onto to this ratio as well as other debt such as credit cards and child support payments. Houses may be getting bigger and more costly but the cost of credit is causing fewer and fewer people to be able to qualify for mortgages.

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Author bio: Brian Kline has been investing in real estate for more than 35 years and writing about real estate investing for seven years. He also draws upon 30 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest. In the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.