Posted onMarch 21/2016
The latest figures show that almost $30 billion is owed by Canadian students in student debt. With many people going back to school in their adult years, this increasing level of student debt brings with it numerous challenges for the average Canadian student. This is clear when examining how student loans can impact your ability to buy or sell a home. And so within this article, we’ll look at how student loans might impact a buyer during their mortgage application process.
Your Debt to Income Ratio
When buying a home, your lender will calculate your debt to income ratio by adding up your monthly payments, along with your expected mortgage, and dividing the total by your monthly income. To qualify for a loan with most companies, your debt-to-income level should be less than 43%. For those with a $20,000 student loan looking to buy a house for $300,000 or more, this debt-to-income ratio could prevent lender approval.
You May Need a Higher Down Payment
In order to decrease their mortgage amount, and thus the amount they’ll be comparing with their income, buyers might consider using a higher down payment for their property. This might mean waiting a little longer to buy their dream home or selling another asset such as a business or a vehicle in order to increase their down payment amount.
Options to Decrease Mortgage Application Challenges
While student debt can have a significant impact on the mortgage application process, buyers do have numerous options available to help overcome these challenges. Let’s look at several steps buyers can take to mitigate the impact student debt has on their mortgage application:
- Consolidate Loans Into One
For those with numerous loans in addition to their student loan, such as a credit card, it can help to consolidate the loan into one loan repayment. This can reduce the overall cost thereby reducing the debt to income level for the mortgage applicant.
- Choose a Longer-Term Mortgage
Another way a person with student debt can reduce their long-term debt to income ratios is to choose a longer mortgage term. This will provide a longer period to pay off the mortgage, thereby decreasing month-to-month costs.
It’s important not to let student debt prevent you from moving forward on your home purchase! There are multiple avenues towards buying a new home for those with student debt. To learn more, speak with our trusted experts