Student debt is a common part of many young Canadians’ lives. As schooling becomes more expensive and more Canadians seek higher education, a large number are coming out of school with loans to repay. Now, as those same people are reaching the point where they are interested in homeownership, they may be wondering if they can buy a home while still holding some student debt. Is it possible to become a homeowner with student loans? Here’s what you need to know.
Does student debt exclude me from buying a home?
Let us start by saying no, having student debt isn’t an automatic disqualification from the mortgage world! Many people have debts, whether that’s from student loans or credit cards, lines of credit, or car loans. Those people also often own homes. It’s important to understand that it’s not the debt itself that matters to lenders the most. It’s how you handle it! If you owe $2000 per month in student loans, that’s no different to a lender than a $2000 credit card payment. In this context, debt is debt, so there’s nothing unique about student loans that prevent you from becoming a homeowner. The big thing to keep in mind is dealing with the debt appropriately. Here are some more details to keep in mind.
Debt service ratios are important
We have covered debt service ratios before. That’s because they’re an essential part of understanding your ability to get a mortgage. Lenders will look at your debt service ratios to analyze your purchasing power and creditworthiness. The first of these ratios is your Gross Debt Service (GDS) ratio. This examines how much of your monthly household income goes towards housing expenses, such as mortgage payments, property taxes, and heat costs. Lenders prefer if your housing expenses don’t exceed 39 per cent of your income. Then we have your Total Debt Service (TDS) ratio. This examines how much of your monthly income goes towards ALL your debts, including household debts and things like your student debt payments. This shouldn’t exceed 44 per cent of your income. The idea here is for lenders to see that you have the financial capacity to make mortgage payments and afford a home purchase, and that you’re not already struggling with debt from student loans. If your ratios are above those numbers, you may have to look at alternative lenders to secure a mortgage. Or, to qualify with prime lenders, you can increase your down payment or reduce your purchase price.
How your student debts affect credit usage
Your credit usage is another important number to have on hand. This percentage takes your current credit balance and divides it by your total credit limit, to see how much credit you use each month. If you can keep your utilization below 30 per cent, that is ideal, because again it shows lenders you have room for more credit and you don’t spend irresponsibly.
Think about how big of a chunk your student loan payments take out of your available credit each month. Do they exceed that 30 per cent? This is not automatically a dealbreaker for lenders. However, it might make them a bit wary about your ability to cover mortgage payments. If you think this is likely to be an issue, you can always take some time to pay off your student loans and reduce your credit usage before applying for a mortgage. Your goal is simply to make student loan payments without it hurting your mortgage application.
Another thing about student debt is how your payment history looks to a lender. Student loans can result in fairly big monthly payments, and how you deal with those gives a lender an idea of how you might deal with mortgage payments. This means if you have a history of missing your student loan payments, it likely won’t sit well with a lender if you ask them for a big mortgage loan. Making your student debt payments on time helps put more assurance in a potential lender. The lenders are looking at your student loan payment history because it shows how you might behave with mortgage payments.
Your payment history will impact your credit score, which is yet another factor lenders will examine. If you have a habit of missing your student debt payments, this will decrease your credit score. Scores below 650 tend to require some tuning up before applying for a mortgage, or else looking into alternative or private lending products. If you think student debt is having a negative effect on your credit score, you can look for ways to improve your score here.
Finally, carrying student debt means it’s essential to have a smart budget in mind for house hunting. Your budget has to consider your debts, because you cannot abandon your other financial obligations when you secure a mortgage. Think about how long your student debt and a mortgage will overlap. When budgeting for a down payment, closing costs, and mortgage payments, set aside the amount you need for student debts before determining the right budget. Student loans might mean you can only buy a less expensive home, but starter homes are a great way to enter the market. Later in life, when your debts are paid off, you can consider moving to a bigger home, but it’s essential to budget around your student debts now.
It’s inevitable that having student debts means they will have to be at the forefront of your mind, including when you buy a home. The good news is your debt doesn’t have to be the reason you can’t buy a home. Lots of homeowners have student debts, and as long as you can manage them properly, your odds of securing a mortgage are quite good.
As always, I’m here if you have any questions about your mortgage! Feel free to contact me here.