Clinton Wilkins and Todd Veinotte discuss the complex banking system challenges in the US and it’s impact on Canada.
I have student debt. Can I become a home owner?
Student debt. Many of us have had it at some point in our lives, and many Canadians are dealing with it today. Going to school is expensive, and student loans are a common solution for tons of people. However, what does that mean for your chances of buying a home if you’re still paying off those debts?
Having student debts does not mean you can’t become a home owner! It just means you need to take these debts into consideration when forming your plan. Here’s what you need to know about purchasing a home while dealing with student debt.
Is student debt different from other forms of debt?
In terms of securing a mortgage, student debt isn’t special compared to other types of debt. Student debt is considered “good debt” because it leads to other opportunities and the chance to make money back as a result of that debt, through a rewarding career. So, if you have student debt, don’t feel bad! It’s worth the cost. Still, student debt isn’t different from credit card debt or a car loan when it comes to how lenders look at your payments. If you owe $1000 each month in debts, that $1000 is the same to lenders no matter what kind of debts they are. The dollar amount is what concerns them. Since many people have debts and still own a home, the same can be said for you with your student debts.
Credit utilization ratios are as important as student debt levels
Your debt levels are important, but perhaps not as important as your credit utilization ratio. This ratio is the result of dividing your credit balance with your total available credit limit, to determine how much credit you’re using. If you spend $700 on a $2000 credit card limit, for example, this means your utilization is 35 per cent. Keeping this ratio on the low end, preferably below 30 per cent, is ideal. The actual credit numbers aren’t as important as the ratio they create. This means if you have a high income to deal with high debt levels, the amount of debt isn’t as emphasized as the fact that you have a high enough income to pay it off.
Plus: Debt service ratios
Debt service ratios are two ratios that also take your income and debt into account. Your Gross Debt Service (GDS) ratio determines how much of your monthly household income you need to cover housing costs, such as mortgage payments, heating, and other utilities. This amount should be 39 per cent or under. Your Total Debt Service (TDS) ratio compares your income with ALL your debts, including those not related to your home. This means things like lines of credit or car payments. This amount should be 44 per cent or under. These numbers are often more important than the exact amount of income and debt.
Your credit score is essential
Your credit score plays a big role in determining your ability to secure a mortgage with student debt. As you know, your score can range from 300 to 900, with scores above 650 being the cutoff for obtaining a mortgage with the best interest rates. One of the biggest things that impacts your score is your payment history. The better you are with making payments (and making them on time), the higher your score. When it comes to student debt, making your payments on time will help prevent your debt from becoming a blocker to securing a mortgage. You can read some tips on raising your credit score here.
We mentioned above that it’s important to keep your debt ratios down, but what if your student debt payments force you to spend more than 44 per cent of your available credit each month? In this case, you might benefit from seeking a credit limit increase. You can have more wiggle room to make your payments without worrying about it affecting your debt ratios and credit score. Just be sure not to start spending more as a result!
Use your income to determine a realistic budget
Buying a home with student debt means you must be realistic about how much you can afford. If your debts are a long-term commitment, make sure you take them into account when budgeting for your home purchase. You will need to have money upfront to submit a down payment, and to pay for closing costs. After that, you will obviously have monthly mortgage payments and utility bills. Whatever your income is, be certain to consider your other debts and obligations before determining your budget for a home. Buying a home you can’t afford will leave you with stress and the risk of losing the house. Being realistic about your income and budget now will save you from hurt later!
One thing to consider…
You don’t need to pay off all your debts before getting a mortgage. Many people have some form of debt, and as long as they can show lenders they have the income to support their debt along with mortgage payments, they can often still secure a mortgage. However, this might mean your budget for buying a home is smaller. If you want a bigger budget to spend on the goal of homeownership, there’s nothing wrong with making it a priority to pay your debts off before applying for a mortgage. However, if getting into the housing market soon is your goal, working with a smaller budget is your best bet. This will enable you to purchase your first property and start gaining equity in the housing market.
The path to homeownership isn’t a straight line that everyone follows. It varies depending on the person’s situation, and there are several twists and turns along the way. Having student debt doesn’t mean you can’t secure a mortgage and buy a home! It simply means you must incorporate it into your home buying journey. Using a mortgage professional will help you understand how to make student debts and a mortgage coexist.
If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.