How do student loans affect your ability to qualify for a mortgage?
First-time homebuyers often ask how their student loans will affect their ability to qualify for a mortgage. In this article, we’ll explain how to qualify for a mortgage with student loan debt. The good news is that student loans aren’t viewed any differently than any other forms of debt by mortgage lenders.
What matters to mortgage lenders is the total debt a potential mortgage borrower has and the size of their monthly payments. This is where some planning for student loan debt can be useful. Not all student loans are the same.
How different types of student loans can affect your mortgage qualification
Aside from the Canadian Student Loan Program, banking institutions offer non-governmental student loans. This is where it can get tricky. The Canada Student Loan Program offers a number of advantages when it comes to mortgage qualification:
Lower monthly payments,
Attractive interest rates,
Interest Free period while attending school,
Potential Interest relief for hardship cases.
Government versus Non-government student loans
Let’s assume a $40,000 student loan is being carried. Based on numbers acquired from the Government of Canada website, a $40,000 Student loan at Prime +5% amortized over 10 years yields payments of $495/month.
If we compare this to a non-government loan, such as a student line of credit for the same amount, interest-only payments at Prime +5% would be $281.67/month. The issue is lenders do not qualify you for your minimum interest-only payment.
When qualifying for a mortgage, lenders must use 3% of the outstanding balance on a line of credit when calculating payments. 3% of $40,000 is a whopping $1200/month which would negatively affect your chances for a mortgage!
Do you have too much student loan debt?
Going to the question of debt and how much is too much, the rule of thumb on non-housing related debt, including credit cards, is 5% – 7% of your monthly income. As an example, let’s take a couple out of university carrying $40,000 of combined student loan debt with an income of $8,000/mo.
At 5% – 7% the maximum monthly debt to optimize mortgage qualification is 5% or $400 up to a maximum of $560/month. Based on the above Canada Student Loan payments of $495/month, this couple could qualify for a mortgage as their student loan is within our lender’s debt allowance. If you are carrying student loans, we recommend you be debt free otherwise.
If you’re a parent with children about to go to university or if you are carrying a student loan yourself and would like to establish a homeownership plan, you can contact Team RRP for a review.
Thinking about buying your first home? Click the button below to download Team RRP’s complete guide to homeownership