How does the home buying process work if you have debt?

Are you thinking about buying a home, but also carrying some debt? It could be from a car loan, student debt, or credit cards. However, does that mean you have to hit pause on your homeownership plans? Not necessarily! Many Canadians buy homes while still paying down other debts. The key factor is how you’re managing those debts and whether you can show lenders you’ll be able to take on the added responsibility of a mortgage. Here’s what you should keep in mind about the home buying process.

Yes, you can buy a home with debt!

The short answer is yes, you can still buy a home if you have debt. In fact, many buyers aren’t completely debt-free when they apply for a mortgage. It’s fairly common to have loans or balances to pay off at the same time. The important thing isn’t whether you have debt, but whether you can manage it responsibly. If you’re making your payments on time and your income supports both your current debt and future housing expenses, lenders can still consider you a solid candidate for a mortgage. This is where your debt service ratios come into play.

What are your debt service ratios?

When you apply for a mortgage, lenders look at two main numbers, which are your Gross Debt Service (GDS) ratio and your Total Debt Service (TDS) ratio. These numbers show how much of your income is being used to pay for housing and for all debts combined.

Your GDS ratio is the percentage of your gross monthly income that goes toward housing expenses. These include your mortgage payment, property taxes, heating costs, and condo fees if applicable. Lenders generally want your GDS to stay below 35 per cent. For example, if you earn $5000 per month before tax, and your housing expenses are $1250, your GDS is about 25 per cent.

Your TDS ratio goes a step further. It looks at all your monthly debts, including your housing costs plus other obligations like credit card payments, student loans, and car loans. Lenders usually want this ratio to stay under 42 per cent. 

The benefits of buying with debt

Building equity sooner

If you wait until every debt is paid off before buying, it could be difficult to enter the market. Over time, home prices and interest rates could shift, making it harder to get into the market depending on market conditions. Buying earlier, even while you still have some debt, allows you to start building equity in your home right away.

Taking advantage of the market 

If prices have cooled in your area or there’s less competition compared to recent years, jumping in while carrying manageable debt could still be a smart move. A lower purchase price often means a smaller mortgage, which can balance out your debt situation. Of course, this depends on market conditions!

Showing responsible financial habits

Carrying debt isn’t automatically a bad thing in the eyes of a lender. What matters is that you show you can handle it! A good credit history, paying bills on time, and keeping balances under control, can actually help your mortgage application.

The drawbacks of buying with debt

Smaller mortgage amounts

The more debt you have, the less room you’ll have in your monthly budget. That often means you’ll qualify for a smaller mortgage than someone with little to no debt. This doesn’t mean you can’t buy a home! It just means you may need to adjust your expectations on budget or location.

Risk of becoming house poor

If your debts already take up a big portion of your income, adding mortgage payments on top could stretch you too thin. Being “house poor” means most of your income is spent on housing, leaving little room for savings, travel, or unexpected expenses. This is one of the biggest risks to avoid.

Stricter lending conditions

Lenders will examine your mortgage application more closely if you have more debt. Some may approve you only under certain conditions, or they may require a larger down payment to reduce their risk.

Should you wait or move forward?

The answer depends on your situation. If your debt is manageable, your credit is strong, and you’re ready to take on the responsibility of a mortgage, moving forward could be a good choice. On the other hand, if your debts are overwhelming or your ratios are too high, it may be worth hitting pause and paying things down before jumping in. Buying a home with debt is possible, and for many Canadians, it’s the reality. What matters most is how that debt fits into your overall financial picture. Lenders want to see that you’re not overextended and that you can comfortably manage both your current obligations and a mortgage.

If you’re unsure where you stand, working with a mortgage broker can help! We’ll review your debts, calculate your ratios, and walk you through your best options. Whether it makes sense to buy now or wait a little longer, you’ll know exactly where you stand and how to move toward homeownership with confidence.

If you have any questions about your mortgage, give us a call at Centum Home Lenders! You can reach us at 506-854-6847, or get in touch with us here.