On average, Canadian students pursuing full-time undergraduate programs paid an average of $6,693 in tuition for the 2021/2022 academic year. Similarly, Canadian students pursuing full-time graduate programs paid an average of $7,742 for the academic year. After graduation, those loans come due, and four years of education can amount to a significant amount that is paid off over a decade or more.
So, what happens if you want to buy a home either during your post-secondary education or later down the road? The good news is that getting a mortgage with student loan debt is possible. However, your debt-to-income ratio and mortgage affordability will be impacted by it. Let’s learn how.
Understanding Debt-to-Income Ratio
Debt-to-income ratio is the percentage of your gross monthly income that goes into making monthly debt payments and is used by lenders to determine your borrowing risk. A low ratio indicates sufficient income and a good balance between income and debt, while a high ratio indicates insufficient income or too much debt. Mortgage lenders want to see low debt-to-income ratios before issuing a mortgage to a potential borrower to ensure they are low risk.
When applying for a mortgage, your lender will look at two key debt ratios. One is your Gross Debt Service Ratio (GDS), which represents the ratio of your income to the cost of your housing and is not typically affected by student loans. The other is your Total Debt Service Ratio (TDS), which represents the ratio of your income to all your debt service requirements, such as housing, credit card debt, and any loans. This is where your student loan debt comes into play.
Most lenders will not let you get a mortgage with a TDS greater than 44 percent. If your loan payments are too high or your income is too low, then you will not be able to qualify.
How Student Loans Affect Your Mortgage Affordability
While getting a mortgage with student loan debt is quite possible, it will affect your mortgage affordability, which is how much you can borrow based on your current income, debt, and living expenses. The higher your mortgage affordability, the more expensive a home you can afford to purchase. With student loans, your debt increases and affects your TDS, so you will likely be approved for a lower amount than you would without any student loan debt.
The other way that student loan debt affects your ability to get a mortgage is due to how it impacts your credit score. In Canada, student loans are a type of debt reportable to the major credit bureaus in Canada – Equifax and Transunion. Therefore, your credit score will be positively impacted if you have been diligent about making payments toward your student loan debt on time. If you have not made regular payments or been late, your student loans will negatively impact your credit score and may hurt your chances of getting approved for a mortgage.
How to Get a Mortgage with Student Loan Debt
Getting a mortgage when you have student loan debt is very doable if you take the proper steps. Here are a few things you can do when applying for a mortgage with student debt:
- Pay off other debt – If you have other types of debt beyond your student loans, it is wise to pay them off as much as possible. Even small amounts of credit card debt will affect your debt-to-income ratio and your ability to get a mortgage while taking care of them immediately will improve your mortgage affordability.
- Restructure your student loan. Debt ratios are based on monthly payments. By restructuring your student loan to extend payments over a longer period of time, you’ll reduce your monthly obligations and positively impact your debt ratios. However, you’ll pay more student loan interest over time, so try to pay it off as soon as possible once you’ve been through the home-buying process.
- Make regular student loan payments – The best thing you can do when applying for a mortgage is to ensure that you make your payments regularly and on time. This will improve your credit score and help your chances of getting approved for a mortgage.
- Get pre-approved – If you aren’t sure about whether you will be able to get a mortgage with student loan debt, apply for pre-approval. This will give you a set mortgage amount and interest rate so that you know what you can afford.
There are always various factors that go into determining the eligibility of a potential mortgage borrower, one of them being student loans. With a good credit score, employment history, and minimal other debt, student loans will not impact your debt-to-income ratio too much nor hinder your mortgage approval process.