Can you buy a home when you have debt?
Next time you’re out in public take a look around. Chances are, the people you’re looking at are in debt. Owing money can be a major obstacle to achieving life goals such as purchasing a home. However, just because your debt has impact on your ability to buy a home, it doesn’t mean you won’t be able to.
What kind of borrowers do lenders look for?
Mortgages in Canada make up the main bulk of debt in the country. And with prices as high as they are, many people need to take out large mortgages to afford the houses they want. That means people need better credit to qualify for the larger sums of money.
A lot of the time it’s not totally clear what makes a good credit score. According to the Globe and Mail, the main influence on your credit rating is your repayment history. People with the highest scores have likely accumulated and paid off debt regularly for a long period of time.
Credit scores aren’t everything, but generally speaking you’ll want at least a “Good” rating to qualify for a good mortgage rate. You can still get a mortgage with bad credit, but that comes with its own difficulties.
How much debt is too much?
The total amount of debt you currently have makes a difference to whether or not you get approved for more credit products. Any lender will take a look at your income and try to decide if you really will pay down the loan.
Say two people are applying for a mortgage. One of them has a combined household income of $60,000, but they paid off all their debts and are ready to buy their home. The other person has about $70,000 in student, car, and credit card debt, but has an income of $120,000 and a good credit history. Chances are they’ll both be approved (the person with a higher income will likely be approved for a bigger amount). Those without as much debt can get good treatment when buying a home and looking for favorable terms.
Some debt is worse for you than others
There are all kinds of debt, some better for you, some worse. If you have multiple debts to pay off and you are struggling to juggle everything, it makes sense to consolidate and focus on paying it off regularly. Generally speaking, higher interest debt should be taken care of first. Meanwhile low interest debt like student loans and most car loans can afford to be paid off a little slower. They also tend to be “safer” debt to have in the eyes of lenders.
You can buy a home, but should you?
The amount of debt you have does affect your credit score as well as your application for a loan. However, if you have a good history of managing debt, you will probably still be able to get a home. The best way to find out if your heart is dead set on buying a home is to get pre-approved.
However, it could be a better decision for you to focus on paying off that debt. Renting isn’t so bad, and it can be a good way to get on your feet before buying a home. Take a close look at your finances to determine whether you will realistically and comfortably be able to handle the cost of owning a home as well as paying off your other debts at the same time.