You have student debt. Can you still become a homeowner?
Post-secondary education is a very common path for many Canadians. It opens up a lot of opportunities and helps young people enter the workforce. However, many students need to take out loans to pay for their education. After they graduate, they often find themselves with a hefty amount of student debt to pay off. How does this coincide with the desire to purchase a home, which is another popular goal in Canada? Can the two exist together? Here’s how the relationship between debt and mortgages work, and how student debt fits into the mix.
How does debt affect your mortgage approval?
There are a variety of factors lenders consider when they evaluate a mortgage application, and debt is a big one. Lenders are not necessarily concerned with the specific dollar amount of debt you hold, but your debt-to-income ratio. This compares your monthly debt payments against your monthly income, and is displayed as a percentage. The point is to understand how much of a borrower’s income is used to pay for all of their debts, including student loans. For example, a person with $3000 in monthly debt payments who has a monthly income of $8000 has a debt-to-income ratio of 37.5 per cent. Lenders are interested in this number, and not the actual amount of debt you have, because it is all relative compared to your income. Ratios below 44 per cent are usually the target to aim for. This will help assure lenders you are a responsible borrower.
Is it still possible to purchase a home with student debt?
Simply having debt doesn’t mean homeownership is out of reach! It just means you need to think through your approach to the process very carefully, and make the decisions that will benefit you the most. For example, your budget as a home buyer may be a bit lower, because you need to account for debt payments along with your mortgage. This doesn’t mean you can’t afford a home, but that you are being responsible in terms of how much you put on your plate. It’s also worth exploring all your mortgage options, and all the products and lenders out there. Your mortgage broker will help you find the perfect fit, but you can take the time to shop around yourself as well! This will help you understand what is available, and where you might fit in. Some people also consider using a parent or other figure as a co-signer on their mortgage. This gives lenders more assurance, and can increase the odds of getting approved for a mortgage.
How to improve your mortgage application
If you decide homeownership is the right path for you, there are some things you can do to help your application. It’s a good idea to submit as strong an application as possible if you have student debt! Of course, the top way to do this is to pay off some of that debt. The less debt you have, the more financial breathing room you can offer to a lender. This will help them feel more confident in your creditworthiness. If it isn’t possible for you to pay off your debt faster, we recommend you ensure your credit score is in the best shape possible. Prioritize making all your payments on time, and always contributing at least the minimum amount. This will strengthen your reputation as a reliable borrower. Finally, you can also think about saving up for a bigger down payment. This will take more time, but it will also reduce the amount you need to borrow from a lender. The smaller your mortgage, the less risk your lender takes on.
Deciding when to wait
While we’ve established it is possible to buy a home with debt, that doesn’t always mean it’s the right decision. There is no shame in holding off until you rid yourself of some of that student debt! It’s better to buy a home when you are financially stable, rather than struggle to make mortgage payments. If your debt-to-income ratio is too high, your income is unstable, or you don’t have a good amount of savings, these are some signs it’s best to delay the purchasing process for now. This doesn’t mean you will never become a homeowner! It means you are making the responsible decision to prioritize your current debts before taking on more.
Student debt and homeownership can have a complicated relationship, but the two can still co-exist. It all depends on your financial situation. If you’re unsure whether this path is right for you, make sure to reach out to a mortgage broker for guidance! We help all kinds of new home buyers enter the market, and we can work closely with you to help you understand your buying power. No matter who you are, this is the right place to begin!
If you have any questions about your mortgage, get in touch with me!