Can I Get a Mortgage With Student Loan Debt?

Finally finishing school can be an exciting and active time for recent graduates with all the new opportunities presented to them.

It can also be rather stressful since you’re now expected to make big life decisions, such as starting your career, finding a partner, and purchasing a house.

And with the real estate market being stronger than ever, you’re likely feeling the pressure to purchase that new home before prices increase even more.

If the idea of home ownership appeals to you, then you might be asking whether borrowing a mortgage is feasible when you are currently paying off a student loan.

In this article, we’ll discuss how your student loan debt impacts your ability to purchase a home, what lenders look for, and other key details.

Why Purchase a Home Now?

The path to homeownership has certainly changed in recent years thanks in part to the pandemic conditions greatly impacting the real estate economy. In the past, you would pay off your student loans before saving up for a down payment and then finalizing on a home.

Today, various factors have contributed to more Canadian home buyers bumping the home mortgage up the priority list. For instance, the Canadian government froze student loan interest at one point, shifting focus towards the housing market as opposed to paying off student debts immediately.

Students facing this choice will be delighted to know that borrowing mortgages with student loan debt is certainly possible, though your approval rate could be affected. The exact rate depends on factors like the price of the home, your down payment, and various others.

Mortgage Affordability: Can You Afford a Mortgage With Loan Debt?

Say that you want to purchase a condo or house in Toronto. What exactly determines how much you can borrow towards that goal? Mortgage affordability is a term that defines how much you can borrow to purchase a new property. It depends on factors like:

• Income
• Current debt (including student loans)
• Living expenses

Naturally, you can achieve a more expensive home the higher your mortgage affordability figure is. Another way to calculate affordability is through the total debt service ratio (TDS) and the gross debt service ratio (GDS), which themselves are based on the factors we just listed out.

We can summarize mortgage affordability by looking at the main factors that contribute to it:

• Gross debt service ratio: The amount of housing debt you are paying compared to your income. It’s not directly impacted by your student loans.
• Total debt service ratio: Involves the percentage of your gross annual income that would go to all your debts and loans, including the mortgage payments, interest, taxes, heating, and your student debt. Other types of debts are included here as well, such as credit card debt or a car loan.
• Credit score: Another important factor that you can actually use to your advantage when buying a home. As long as you make your student debt payments on time, your credit score will increase. If you default, it goes down. Expectedly, a higher credit score improves affordability and raises the amount you can borrow for a mortgage.

Talking with your bank is the best way to get exact numbers and see the process of mortgage affordability in action. These factors will paint an overall picture of what type of properties you should be looking at. Either way, it’s still certainly possible to borrow a mortgage while on student loans.

Tips For Securing a Mortgage With Student Loan Debt

Still paying off those loans from college but still interested in finding a house or condo to call your own? Some best practices to approach the process are:

• Make all your debt payments: Whether they’re credit card payments, car loans, or the student loans themselves, paying off all your debts on time goes a long way to improving your credit score and subsequently your TDS and mortgage affordability.
• Seek pre-approval from your bank: If you have doubts about what you can afford, a no-obligation application from your bank is an excellent way to pre-approve yourself for a certain borrowed amount and interest rate.
• Take control of your savings: Especially in terms of saving up for the down payment. And remember that paying off other debts matters as well, so factor everything in when making plans. The minimum down payment you can have is detailed by the government of Canada.
• Ask your parents for help: It’s not uncommon for young, first-time home buyers to turn to their parents for help. In fact, in 2021, CIBC revealed that parents give $82,000 on average to help their children purchase their first home.
• Look for house hacking opportunities: House hacking continues to be another popular option. In this scenario, first-time homebuyers may look to purchase a home that can be divided into two or more rentals. This option is attractive since banks will take a portion of the rental income into account when assessing your gross debt service ratio.
• Work with an experienced real estate agent: Look for someone who can guide you through the process and help you choose the perfect property—no matter where you’re looking.

Remember that a local real estate agent is ideal. You want someone who knows the area well and can give you an excellent deal, which results in a lower mortgage payment and more satisfaction on your end of what you’re getting.

Have Questions About Purchasing a Home? I Can Help

The takeaway here is that you don’t necessarily need a perfect credit score, zero debt, or the dream job to get a mortgage today. Talk with your bank and discuss your options with a local real estate agent to get the best results.

Interested in a Toronto property but not sure where to start? Joel Cooper has already helped countless clients find their dream homes through experience and a client-centered approach, so get in touch with him today.