Can I Get A Mortgage If I'm In Debt?

Many people dream of owning a home. But with consumer debt in Canada at an all-time high, a significant number may worry that goal is out of reach. The short answer to the above question? It depends on your situation. 

To understand what that means for you, we'll need to  look at the steps required to get a mortgage and what a lender is looking for.

Pre-Approval:

Before looking at properties, you'll need to know how much you can borrow, what the interest rate will be and your expected mortgage payments. This is the pre-approval step. To provide you with a mortgage pre-approval, a lender needs to know all your background information –, including your income and your liabilities (i.e. debts).

Your income will determine how much money you may borrow. The following information will provide the lender with a good picture of your earnings:

• Current paystub
• Letter from your employer detailing position, tenure and salary
• Most recent tax return and corresponding notice of assessment

Your liabilities, on the other hand, will inform your lender about how much of your income is currently disposed in covering outstanding debts. You may earn good money, but it's not much use if it's offset by your other payment responsibilities. The lender will also need to know the following;

• All secured debt obligations (e.g. car loan,)
• Any unsecured debt (e.g. credit cards, lines of credit, student loans, spousal or child support payments, etc.)

Balancing Your Picture

Your secured debt monthly payment(s) are a known amount that will reduce the mortgage amount that you qualify for. If you owe $500 per month on a car payment, for example, the lender will deduct that from your available income when calculating your pre-approval.  For  unsecured debts, lenders will typically  account for 3% of the current balances. So, if you have$10,000 in unsecured debt, that translates into a further reduction of$300 per month from your qualified mortgage value.

Stress Test:

Per the Office of the Superintendent of Financial Institutions, as of January 1, 2018 anyone seeking a new mortgage or refinancing with a new lender is required to pass a "stress test" to qualify. Federally regulated lenders need to ensure that borrowers could afford to make mortgage payments at an interest rate that is higher than their pre-approval. While this may seem punitive, it is a necessary measure to protect homeowners who may otherwise be ill prepared for an unexpected rise in monthly expenses.

Simply put, this means you now need to quality either at the Bank of Canada's five-year benchmark rate or two percent higher than your pre-approval rate, whichever is higher.

Online Tools:

Several online tools are available which can help you simulate a variety of scenarios to determine whether homeownership is possible and / or advisable given your current situation. Particularly helpful is the Mortgage Qualifier Tool from the Financial Consumer Agency of Canada. After providing your income, expenses and expected down payment, it  determines whether you would qualify for a mortgage. 

Don't get discouraged if you do not currently qualify. There are steps that you can take to get yourself into a better position. The most critical first step is to reduce your debt. Decrease your spending and put more money towards the outstanding balances. You may even consider consolidating your debt into a manageable monthly payment so you can pay it off faster with less interest.

Free Confidential Consultation

If eliminating your unsecured debt seems insurmountable on your own, a Consumer Proposal may be an effective solution. While it will affect your ability to get a mortgage right away, it will also give you time to start saving towards a down payment — lowering your eventual payments and providing better opportunities down the road. Contact a Licensed Insolvency Trustee at MNP Ltd. today for a Free Confidential Consultation. Together we can discuss your options and help you choose the one that's best for you. Let's defeat your debt so your home purchase dreams can become a reality.