How to approach homeownership with student loan debt

For many Canadians, buying a home and securing a post-secondary education are two very important goals. It is a common ambition to want to attend university or college, and be able to purchase a house once you have a job as a result of this hard work. However, these two events can sometimes get in the way of one another. Post-secondary education is pricey, and many people need to take out student loans to pay for their studies. However, what does this mean for your plans to buy a home? Can you still do so if you have outstanding student debts?

How does student loan debt affect a mortgage?

Lenders examine several factors when you apply for a mortgage. These include your income, credit score, payment history, and your other expenses or debts. This is where your student loans come into play, as they are part of your debt-to-income ratio. Your total debt service (TDS) ratio compares your total debts with your income, which is expressed as a percentage. If you have monthly debt expenses of $2000 on a $5000 per month income, for example, your TDS ratio would be 40 per cent. Traditional lenders like to see this ratio stay around the 44 per cent mark or lower.

This means that the higher your monthly student loan repayments, the higher your TDS ratio. In theory, this means the more student debt you have, the less room you have to also support a mortgage. But does this mean a mortgage is out of the picture?

Focus on paying off your debt strategically

Even with student debt, many people can still complete a home purchase. You don’t need to be completely debt-free to be a home owner. The key is knowing how to manage your debt and show you can handle a mortgage on top of your current financial obligations.

The most important thing you can do is make all your payments on time, every time. Late or missed payments are an indicator that you may not be able to handle the additional financial burden of a mortgage. Even if you can only pay the minimum amount for each debt, this is better than neglecting some in favour of others. During this period, try not to apply for additional credit or make any large purchases. You don’t want to bite off more than you can chew, so focus on paying off your current expenses before taking on more.

Another key point to consider is your credit utilization. This is the amount of credit you use compared to what you have available. For example, if you tend to spend $1000 per month on a $5000 credit limit, your utilization ratio is 20 per cent. Keeping your utilization on the lower end shows you have the capacity to take on a mortgage!

How can you save for a down payment?

Saving for a down payment can be tricky when you have large financial commitments on the go such as student loan debts. However, you have some options in terms of the size of your down payment, and how you can access it.

First, remember that you do not always have to save a full 20 per cent for a down payment. If you buy a home for under $1 million, a 10 per cent contribution is accepted. For homes under $500,000, you can contribute a five per cent down payment. This allows you to break into the market sooner, but keep in mind this will result in a larger mortgage. If you have a family member who can help you with your down payment, lenders will also accept this with the right documentation. This is called a gifted down payment, and it is becoming increasingly common.

Finally, keep in mind that you might be able to take advantage of certain government incentives that can help you enter the market. If you have a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), you can often use these to support a home purchase. You could also look into the First Home Savings Account (FHSA), which is designed for new home buyers!

Reach out to a broker for support!

Every home buyer is unique, and you deserve to work with a professional who can tailor their services to your situation. If you are dealing with student loan debts and are not sure where to begin your home buying journey, it’s important to reach out to a mortgage broker! We will work closely with you to understand your financial circumstances and find the right lender for your needs. Every lender is different, and we will help connect you with the lender who will best suit you. Plus, we make it a priority to ensure you understand your options and feel confident in the market!

Buying a home with student loan debts can be tricky, but it is definitely possible. It’s all about learning how to manage your financial obligations and determining how a mortgage might fit into your current situation. If you are ready to get started, reach out to your mortgage broker today!

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.