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Student debts have become a common part of life for many Canadians. Currently, Canada is approaching the two million mark for the number of citizens with existing student debts, with some owing as much as $20,000 or more. These are fairly high numbers, so is it possible for Canadians to secure a mortgage with student debts?
Homeownership is a goal for many Canadians. Unfortunately, lots of people have doubts as to whether they can actually get approved for a mortgage while juggling student loans. The good news is, you can in fact own a home while still paying off your student debts. It’s all about how you handle these debts in your day-to-day life.
Here’s how student debts can impact your mortgage application, and what you need to consider before applying.
Understanding credit utilization ratios
It’s important to be familiar with credit utilization ratios when applying for a mortgage, especially with student loans. This ratio compares the amount you spend to your total available credit limit approved by your bank. You can calculate it by dividing the balance of your credit card by your total available credit. For example, if you owe $400 on a $1,000 credit card limit, this gives you a ratio of 40 per cent. Keeping your score under 30 per cent helps build your credit score, as it shows responsible spending, which can aid in your journey to buying a home with student debts. Since a good credit score is helpful for securing a mortgage, especially if you’re already dealing with other debts, this is a handy ratio to keep track of.
Of course, having student loans may mean you have no choice but to spend more than 30 per cent of your credit each month, once other essential payments, such as your student loans, are taken into consideration. If possible, try applying for a higher credit card limit. This gives you more available credit, which can help balance your ratios. If this isn’t an option for you, make sure you make your payments on time to show you’re financially responsible.
How much do you owe each month?
How big are your student loans? As we mentioned above, it’s best if your debts don’t take up too much of your credit limit. However, we also need to look at something called debt service ratios. Specifically, your Total Debt Service (TDS) ratio is what matters the most here. This is how much of your income is used to pay for things like a mortgage, taxes, and your debts. This number shouldn’t exceed 44 per cent of your income. It’s important to remember this figure when buying a home with student debts. If you can’t keep this ratio below 44 per cent, don’t be surprised if you’re approved for a smaller mortgage amount.
What’s your budget?
When you’re calculating your budget for a home, you need to figure out how your existing debts might impact it. Your budget might be smaller now than it would be if you didn’t have any debts. Does that mean you need to pay off all your debts before buying a home? Not necessarily! You can likely still buy a home as long as you’re realistic about your budget. Buying a home with student debts might affect your budget limits, but it doesn’t have to rule out homeownership.
Analyzing your payment history
Lenders will want to make sure you have a solid history of paying back your debts before they approve you for a mortgage. Missing or late payments will lower your credit score, which is a valuable part of securing a mortgage. If you’ve struggled with credit card and student loan payments, lenders will hesitate to approve you for an even bigger loan. Do your best to always make your payments on time. If you don’t have a good history of making payments, you might want to spend some time focusing on building your score back up before applying for a mortgage.
Consider your income
This seems obvious, but when buying a home, you need to think about how much you bring in each month. Lenders want to see that you have a stable, steady income before they approve you for a mortgage. If you want to qualify for a conventional mortgage, you’ll need to prove you can handle the payments on top of your student loans. You can also compare your income with your ideal budget to see if it will be realistic for you. It’s best to know now what you can afford, so you’re prepared when you enter the market.
Having student debts doesn’t mean you can’t buy a home, but it’s all about how you handle those debts before applying for a mortgage. It’s important to determine if you can handle more debt. A mortgage broker can help determine how much you can afford, and decide the best move for you!
If you have any questions about applying for a mortgage with student debts, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.