June 03 2022
Many Canadians will go into adulthood with student debt from their post-secondary education. Since student loans are one of the most common ways to pay for school, it's not surprising that many potential homebuyers find themselves trying to manage their debt while saving up for a down payment after graduation.
According to the Canadian Federation of Students, Canada had approximately 1.7 million student borrowers with a total debt of $18.2 billion in 2017 – and that number continues to grow. As a result, many are wondering whether it’s even possible to buy a home while still managing student loan debt.
How does student loan debt impact your mortgage eligibility?
While it is true that you can get a mortgage with student debt, it’s important to understand how it will impact your mortgage eligibility. When applying for a mortgage, your lender is going to take a variety of factors into account to determine whether or not you can get approved.
One of the most important factors is your debt-to-income ratio. A debt-to-income ratio is used to confirm how much you’re eligible to borrow from the lending institution, which then determines the type of home or neighbourhood you can buy in. When you have a lot of student debt, this can be a roadblock, especially if your debt outweighs your income.
Lenders will also look at your credit score. The quality of your credit score is impacted by any credit card debt, lines of credit or loans you may have. Prime A or B Lenders typically favour applicants with credit scores 650 or higher. To keep your credit score in a strong range, making regular payments on time and managing your debt is essential.
Not all hope is lost. You can still get a mortgage if you have student debt.
There are several options people can use to secure a mortgage even with student debt:
Consider and shop different lenders
Most people typically run to the big banks when it comes to shopping for a mortgage, but it’s important to look beyond this. Other Prime A lenders like credit unions and monoline lenders may be able to provide mortgage options with a greater selection of features better suited for your financial situation. If you’re applying for a mortgage with a little more student debt than you’d like, getting approved might be more difficult with an A lender.
If so, consider looking into B Lenders or private lenders as an alternative. B lenders are typically used when borrowers are turned down by A lenders because they offer more leniency. These lenders have higher rates, require a 20% minimum down payment and their terms are usually one or two years – giving you the flexibility to switch to a Prime A lender at the end of the term if possible.
Private lenders are more short term and typically lend on one-year terms. These lenders are not represented by traditional banks, monoline lenders or credit unions, and are used when borrowers can't qualify with A or B lenders. Their requirements are much less stringent because the mortgage is primarily focused on the property and not the owner’s qualifications. However, their interest rates will be higher compared to A and B lenders and come with a percentage fee.
Pay off other debts
If you have other debts such as credit card, auto loans or any other outstanding loans, you’ll want to pay those off before starting your home search. This will help to improve both your debt-to-income ratio and credit score and thus increase your chances of approval – bringing you one step closer to homeownership.
Get help from a family member
Nowadays, it’s very common for first-time buyers to get help from a parent or close family member, whether through gifted funds or having them act as a co-signer. If you’re struggling to come up with a down payment while managing student debt, gifted funds, which you don’t have to pay back, can help with your overall home affordability.
Alternatively, you could also have a parent or family member act as a co-signer on your mortgage. A co-signer is someone who applies for a mortgage loan with you and legally agrees to take liability and pay off the debt if you can’t make payments. So if you have more debt to pay down and are lacking in areas such as a strong credit score or debt-to-income ratio, a co-signer can provide your lender an additional layer of assurance until you can pay down your student debt.
Get pre-approved with Homewise
Getting pre-approved for a mortgage will give you a clear picture of your home affordability and help you budget better. A mortgage pre-approval is an agreement between you and your lender to hold a mortgage rate and product for up to 120 days. If you are a student with lingering debt, this process will help you identify what areas you need to improve before you start looking for a home, or better, how much you’re eligible to borrow so you can start shopping in neighbourhoods that fall within your price range.
Buying a house can be a stressful experience, especially if you have a cloud of debt hovering over your head. Nonetheless, our team at Homewise is here to help. If you’re looking to purchase a home in the near future and want to navigate the various mortgage options available, apply online with us in just five minutes today! One of our dedicated Mortgage Advisors will be in touch to discuss the best strategy for your unique financial situation.
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