Buyers Guide: Mortgages and Student Debt

We’ve talked about mortgages in depth recently and gone through the importance of getting your mortgage pre-approval. As a buyer in the current Windsor real estate market, a condition of financing will almost certainly move you to the bottom of the list when the seller looks at offers. As discussed, your Windsor REALTOR® will advise you to get a mortgage pre-approval prior to starting your search for houses for sale in Windsor and visiting various Windsor homes for sale that may be right for you. One thing to consider for first time home buyers is the effect your student debt may have on the process. We’ll dig deeper into that in this post.

The first place your student debt will have an effect is on your mortgage affordability. Basically, this is how much you can borrow to purchase a home based on your current income, your debt, and your living expenses. Simply, the higher your mortgage affordability, the more money you will have available to you when purchasing. Mortgage affordability is determined using two ratios, total debt service ratio and gross debt service ratio. Your student loans will not affect your gross debt service ratio. It will however affect your total debt service ratio, as it takes your debt into account. Here is an example of how your debt can affect your mortgage affordability. If you and your partner have a combined annual income of $110,000 and have saved up $50,000 for a down payment assuming an interest rate of 1.65%, your maximum purchase price would be around $520,000. Let’s add in $700 in monthly student loan payments and you only have about $490,000 available from the lender, a roughly $30,000 change in buying power.

The second place your student debt will affect your ability to buy a home is your credit score. In Canada, student debts are reportable, meaning they’ll show on your credit report. This is a double-edged sword. If you are always on-tim and making payments, it will actually help your credit score. However, if you are late or have missed payments, your credit score will be negatively affected. Your credit score will factor into that pre-approval we’ve discussed.

As a first-time home buyer, it is important to understand how your student debt can impact your credit, your mortgage affordability, and your ability to buy a home. It is important to weigh all of these factors when you decide if you want to move forward with home buying or wait to pay that debt off.

Here at Jump Realty our agents will give you honest advice on what course of action is best for you in their professional opinion and will always put taking care of your best interests first! With offices in Windsor, Tecumseh, Kingsville, and Chatham, no matter where you are, a Jump agent is ready to help. Please contact us for any housing needs and let us give you a better real estate experience!