Could a Mortgage for Debt-Ridden Millennials Be Too Good to Be True?
The Everest-high price of most college educations—and the impact of massive student debt on an entire generation of would-be home buyers—has become one of the defining issues of this crazy presidential election season. So it shouldn’t come as a shock that a lending company has rushed into the void to capitalize on the unease and frustration of loan-burdened millennials desperate to muster up a down payment on a home or qualify for a mortgage.
The BurkeyLoan, developed by financial company Burkey Capital, is expected to hit the market this fall with a seductive and unique sales pitch: to help college grads become homeowners by rolling their student debt into a 30-year fixed mortgage.
The groundbreaking new loan is raising eyebrows in the mortgage community due to its revolutionary nature—as well as the skimpy information that’s available so far about the mortgage or its sponsor company. At this writing, the loan’s bare-bones, one-page website was noticeably stingy on, you know, details.
So is it too legit to quit—or too good to be true?
How it will work
So here’s how it’s supposed to work. The target borrower will be the crème de la crème of college grads (think doctors or lawyers instead of store managers). They’ll be in the top 20% or so of earning households, have stellar credit, and have at least three to four years of work experience where they raked in at least $150,000 a year, according to the company.
They’ll also need to work in fields, such as medicine, where if they lost their jobs, they could easily find another. So already this excludes most cash-strapped college grads.
Initially, the program will be offered only for jumbo loans, which start at $417,000. But that is expected to eventually drop to help facilitate the purchase of properties in the mid-$200,000s, says John Burkey, the CEO of both BurkeyLoan and Burkey Capital.
Borrowers will be expected to chip in a 10% down payment when both the price of the home and the outstanding student debt have been added up. “We want them to have skin in the game,” Burkey says.
Translation: If a borrower with $100,000 in student loans wants to buy a $500,000 home, they’d be on the hook for 10% of $600,000. That comes out to a $60,000 down payment. But in some cases, buyers could put in less, he says.
In addition, if a major life event occurs, such as someone falling ill or experiencing a death in the immediate family, their payments can be deferred for a time.
Burkey describes Burkey Capital as a private, family-owned investment company. He plans to fund the loans through institutional investors—essentially pensions and endowments—who will invest in a fund that buys the loans. Burkey expects to eventually expand into real estate investment trusts.
He says paperwork will be filed with the U.S. Securities and Exchange Commission once the mortgage is licensed in all 50 states. He is currently in the licensing process.
The catch?
Borrowers might not get the best deal on mortgage rates. They could range from about market rate to about 1.4% higher, depending on various factors, including the amount of their down payments, Burkey says.
“Our rate includes the perceived risk we believe we’re taking,” he adds. Mortgage insurance will neither be included nor required.
But a loan of this type this could prevent homeowners from selling, refinancing, or even securing a home equity line of credit, says Don Frommeyer, CEO of the National Association of Mortgage Brokers, a Plano, TX–based trade organization.
That’s because if a borrower wants to sell that $500,000 residence we referenced above, she’ll have to come up with the balance on her student loans at closing. And if she has a lot of student debt—say, tens of thousands of dollars—that could be a big problem.
“They’re going to get stuck in the home … because they’re going to owe more on the house than what it’s worth because they’re adding the student loans,” Frommeyer says. His opinion: “It’s a fantasy loan.”
Burkey says he expects borrowers will stay in their properties for seven to eight years, during which time their homes will (hopefully) appreciate in value.
Of course, if a home appreciates enough, it could wipe out the owner’s student loan debts when it comes time to sell, says Karen Deis, publisher of Mortgage Currentcy, a subscription-based website covering rules and regulations in the mortgage industry.
But it would still be financially safer for debt-ridden, wannabe homeowners to take out a second mortgage instead to pay off their student loans, Deis says. That way it won’t matter quite so much if the property gains—or loses—value.
“They would have the option to pay [the loans] off earlier and still have the mortgage at a lower rate,” Deis says.
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