Can having too much student loan debt throw a wrench in your mortgage approval process?
College and university tuition is as high as it’s ever been. The average tuition for full-time students enrolled in undergrad programs across Canada was $6,838 in the 2018/2019 year, up 3.3 per cent from the year before. And the higher up the ladder you go with your post-secondary education, the more money you’ll be spending.
Multiply that number by the three or four years that it takes to complete a program and obtain a degree, and you’re looking at spending at least $20,000.
That’s a lot of money to pay upfront, especially for young adults, which is why student loan programs are available to those who qualify. Student loans make it possible for many college-aged kids to attend a post-secondary educational institution.
But after the cap and gown ceremonies are over, graduates are left with a mound of student debt to pay off. And that often comes at a time when they’re ready to buy a home.
With so much debt on the books, is it even possible for these grads to get a mortgage? Considering the fact that it takes anywhere between 9 to 15 years to fully repay student loans, many adults are often stuck with their student loan debt years after graduation.
College grads carry an average debt of $10,172, while university students typically get out of school with an average debt of $16,727. Doctoral grads have even more student loan debt at an average of $29,000.
So, how can student debt affect your chances of securing a mortgage?
Saving For a Down Payment Can Be Tough
If you’re dedicating a good chunk of money towards paying down your student loan debt — as well as all other debt — you might not have that much left over to save for a down payment.
When it comes to mortgages, you’re required to put a certain amount of money down before your lender will supply you with a home loan. For conventional mortgages, that number is a whopping 20 per cent of the purchase price of the home, while high-ratio mortgages require a minimum 5 per cent down payment.
You’ll certainly need to take the time to save up for a down payment before applying for a mortgage and searching for a home to buy. But with a student loan still on the books, you may also want to focus on whittling that pile down a little in order to free up more money to save for a downpayment.
Your Debt-to-Income Ratio Could Be Negatively Affected
Lenders look at all sorts of factors before deciding whether or not to approve a mortgage applicant on a home loan, and that includes their debt-to-income ratio. This ratio represents a percentage of your debt relative to your income. Basically, it paints a picture of how much of your income goes towards paying down your current debt.
The more debt you have on the books (or the lower your income), the higher your debt-to-income ratio will be. Obviously, student loan debt will contribute to your debt load and will, therefore, be included in this ratio.
Lenders typically like to see debt-to-income ratios as low as possible. Generally speaking, 40 per cent is usually the maximum ratio that lenders will typically accept, though this number will vary from one lender to the next. Anything higher will put undue financial stress on borrowers.
Depending on how much you still owe on your student loan, this could have a big impact on your debt-to-income ratio and therefore your ability to qualify for a home loan.
Your Credit Score Could Be Affected
Your credit score plays a key role in your ability to get approved for a mortgage, or any other type of loan. The higher your credit score, the higher the chances of securing a mortgage. But with a low score, your chances of getting approved plummet.
There are a few factors that influence credit scores, including the amount of debt that you carry. Carrying a lot of debt can hurt your credit score and therefore your ability to secure a new loan.
Even with a low debt-to-income ratio, a poor credit score can throw a wrench in your ability to qualify for a mortgage. And if any student loan payments are missed, this could affect your credit score even more.
That’s why it’s important to focus on paying down your student loan as much as possible before applying for a loan. Even if you are able to qualify, adding another loan into the mix can put a lot of extra stress on your finances. At the end of the day, the less debt you have, the better in terms of landing a home loan.