Can you purchase a home with debt?
You want to purchase a home, but you already have some debt. What are your options? Buying a home with debt is something many Canadians might need to consider as they prepare to enter the housing market. The issue is knowing whether this is a move you can support or not. Here’s some important information on purchasing a home with debt, and what you should know going into the process!
Can you buy a home with debt?
Purchasing a home with debt is possible, and it’s actually pretty common. If you take a moment to think about it, you’ll realize there are several forms of debt that many Canadians hold. You might have credit card debt or open lines of credit, for example. You could also be paying off student loans or a car purchase, both of which are types of debt. Many existing homeowners have made their home purchases while dealing with these types of expenses.
When it comes to homeownership, lenders tend to be more interested in your debt service ratios than the actual debt. Debt service ratios calculate how much income you need to pay for housing and other expenses. Your gross debt service (GDS) ratio shows how much of your income goes towards housing expenses, while your total debt service (TDS) ratio represents the amount of income you need to support all of your debts. Ideally, these ratios should fall below 39 per cent and 44 per cent, respectively. This means if you have debts, but your ratios still fall within a reasonable range, you may still qualify for a mortgage.
Why might you buy a house with existing debts?
So, why would someone choose to buy a home when they already have debt? Ideally, you would want to be debt-free when you take on such a huge purchase. However, it can be hard to have your debts completely paid off by the time you want to buy a home. Plus, as we mentioned, your debts might not have a huge impact on your homeownership experience. The biggest reason people go ahead with their purchasing plans is to jump into the housing market sooner. Owning a home allows you to start building home equity, and it means you own a valuable asset. Waiting until you no longer have any debts could take a long time. During certain periods, housing market conditions are ideal for purchasing and buyers may not want to miss their window of opportunity. We often see this during periods of low interest rates or falling housing prices.
What are the risks?
Although someone may be able to buy a home with debt, that doesn’t necessarily mean they should. There are certainly some risks in doing so that are important to be aware of before you decide to plunge into the market. First, your mortgage approval amount might be smaller than you would like. If your lender has any reservations about your ability to make your mortgage payments, they may limit the amount they are willing to finance. This could impact your buying plans and your options in the market. The biggest issue, however, is the potential for becoming house poor. A person who is house poor must spend the majority of their income on housing expenses so they can maintain their homeownership. This can lead to further issues with debts, and in extreme cases, defaulting on your mortgage. It’s very important to make sure you can afford to buy a home if you are already dealing with debt.
How can a broker help?
A mortgage broker is essential for anyone who wants to buy a home. However, it is extra important to use a broker if you are buying a home with debt. Your broker can determine whether homeownership is something you can truly afford on top of your debt. We can also help you break down your expected costs, and how that will affect your finances. Plus, we perform the usual services of helping you secure the right lender and product!
The decision to buy a home is always a big one, and even more so when you already have debts. We are here to ensure you make the right decisions based on your situation, and that your experience in the housing market is a successful one.
If you have any questions about your mortgage, get in touch!
