As if there weren’t already plenty of reasons why you should keep student loan debt to a minimum, there’s yet one more. One day you may want to buy a home and you’ll need to take a mortgage in order to do it. A student loan could cause complications! This is particularly true if your student loans are on the larger end of the spectrum, or if your income isn’t quite as generous as you had anticipated when you were in university and incurring the debt.
Student loans can present some problems for would-be homeowners, not the least of which since the loan terms on student loans can stretch out for many years, running right into the time of your life when family and a home to house them in move to the front burner.
Here are some factors to consider while you are still in university, and how they may one day impact your ability to qualify for a mortgage to buy a home.
It’s Not All About A Pretty Credit ScoreMost homebuyers assume that their good credit scores are sufficient to get them the mortgage of their choice. Sometimes that works – as long as everything else is where it needs to be.
But mortgage lenders look at several factors, in addition to credit scores:
- Assets – that you have enough money to cover the down payment, plus extra to cover reserves after closing.
- Debt -to-income ratio – they divide your total monthly debt obligations, including the proposed house payment, by your monthly income. Generally they will allow up to 40-45% of your income to go toward total debt; a large student loan payment could put you over the allowable ratio.
- Income stability – they will evaluate how long have you been earning the income you have, and how likely it will be to continue.
- Significant delinquency – even if your credit scores are good, lenders will look at specific credit activity; activity on certain loan types are more significant than others, and student loans, because of their size, are one of them. A late or two here could be damning to your mortgage approval.
Student loans – both the amount and the quality of your payment history – could have an effect on at least a couple of those categories.
Equally significant, student loans that are in deferral status at the time of mortgage application could have an effect. Lenders will sometimes impute a monthly payment on a deferred loan in order to accurately measure the future risk the loan will represent. Though you may think the debt is a non-factor, due to the deferment, the lender may not ignore it.
House Prices Are Hovering In Record Territory And Student Loans Won’t Help
Still another potential issue for those with large student loan debts is the fact that house prices nationwide are hovering at record levels. Canada Mortgage and Housing Corp recently forecast the average house price across the country to rise to over $400,000 in 2015, and that’s just the average. In some markets, like Toronto and Calgary, and especially Vancouver, prices are substantially higher.
Large student loan debts could make qualifying for mortgage financing even more difficult, particularly in the priciest markets. The continuing house price spiral practically guarantees that this will be a problem for the foreseeable future.
Buying A Home On A Shoestring – Where Student Loans Can Hurt Most
The vast majority of university graduates will be first time home buyers, and that usually means that they will be buying on a shoestring. The down payment will be minimal, and debt-to-income ratios will be stretched to the maximum allowable levels. A large student loan payment will reduce the size of the mortgage that you will be able to qualify for, and that could make it close to impossible to buy a home, particularly in the highest priced markets.
Keep Student Loans To A Minimum – While You Still Can
Why be concerned about this now, while you are still in university? The debts that you are accumulating right now – as necessary as they may be – may limit financial options in the future, including the type and even the location of the home you will one day purchase.
It all makes a strong case for doing what you can now to keep your student loans as low as possible. Earn extra money when and where you can, keep your expenses to a minimum, and avoid thinking that the sky’s the limit on your education just because you can pay for it with student loans.
A little bit more attention to your debt level now can have a major positive impact in just a few years when you’ll be making major decisions about the rest of your life – like buying a home.