When it comes to getting approved for a mortgage, the type of debt you carry can significantly influence a lender’s decision. Lenders typically assess debt in one of two ways: either by considering the entire balance and calculating it into monthly payments or by factoring in the actual monthly payment impact on your cash flow. Certain types of debt are easier to manage and pay off, which can help keep your debt service ratios down and your credit score up.
If you’re facing complications with your mortgage approval due to existing debt, even with good credit, we can help. Whether you need to consolidate debt, combine several mortgages, or require a short-term solution to overcome a temporary financial hurdle, we’re here to guide you through it. Here’s a breakdown of how different types of debt can affect your mortgage approval:
Federal Debt
Example: Canada Revenue Agency (CRA) Debt Lenders require the entire balance of any CRA debt to be paid off immediately. If you owe back taxes or are in arrears, this debt must be cleared before any lender will consider your mortgage application.
Credit Card and Line of Credit Debt
Type: Revolving, Unsecured Debt Lenders typically look at the entire balance of your credit cards or lines of credit to calculate a monthly payment, regardless of how much you actually pay each month. High balances can negatively impact your mortgage borrowing potential. Regular payments on these debts are crucial, especially if you carry balances from month to month. Aim to avoid spending more than 75% of your limit and clear your balance often. Some lenders may even calculate your debt based on your entire line of credit limit, not just the balance.
Mortgage Debt
Type: Secured Debt Your existing mortgage payments are a type of installment debt. Since mortgages are typically spread over 25 years, lenders will use either your potential monthly payment based on your affordability or your actual current mortgage payment in their calculations. While this debt is significant, it may have less impact on your debt service ratio than high balances on credit cards or other unsecured debt.
Installment Debt
Example: Vehicle Loans Installment debt, such as a car loan, has fixed monthly payments over a set period, making it easier to budget around compared to revolving credit. Lenders use your fixed payment amount rather than the entire loan balance to calculate your debt service ratios. While these debts usually take less time to pay off than a mortgage, they still represent a long-term commitment.
HELOC Debt
Type: Revolving, Secured Debt A Home Equity Line of Credit (HELOC) is secured by your home and is often used to consolidate higher-interest debt or for significant expenses like home renovations. While it’s more flexible than an unsecured line of credit, the entire balance is factored into your debt service ratios, directly impacting your mortgage approval.
Student Loans
Lenders will calculate a portion of your student loan balance into your monthly debt load. Although student loans generally carry lower interest rates and offer more flexible repayment terms, they still affect your debt-to-income ratio.
Spousal or Child Support Payments
If you are making spousal or child support payments, these are factored into your debt service ratio. Conversely, if you are receiving these payments, they are added to your monthly income.
Managing Your Debt for a Healthier Credit Picture
Your debt repayment habits directly impact your credit score and debt service ratios, which are crucial factors for mortgage approval. Being realistic with your income and budget can help you maintain consistent payments, contributing to a stronger credit profile. The longer you demonstrate good payment history, the better your chances of securing a favorable mortgage rate.
Let Us Help Simplify the Process
Understanding how different types of debt impact your mortgage approval can be complex, but at Canadian Mortgage Professionals, we make it easy. Our expert brokers can answer all your debt-related questions and quickly process your pre-approval so you know exactly where you stand.
Curious about your credit report? You can check it for free with Equifax Canada. https://www.consumer.equifax.ca/personal/products/credit-score-report/
Get Expert Help for Your Mortgage Needs
No matter the type of debt you have, we’re here to help you sort it out and develop the best strategy for your mortgage pre-approval. Whether you’re buying your first home, switching lenders at renewal, or refinancing for additional funds, our unbiased brokers are committed to providing you with the best mortgage experience.
Reach out to us today for straightforward advice or complex mortgage solutions. At Canadian Mortgage Professionals, we’re dedicated to helping you achieve your homeownership goals.
