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25 May

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Debt can be discouraging for those who want to buy a home and apply for a mortgage. It’s true that having debt, and poor credit, make it more difficult to apply for a mortgage loan. However, it doesn’t mean that getting a mortgage is impossible.

There are many reasons Canadians fall into debt, including student loans, and credit card debt. If you have a definite plan for getting out of debt, and are making regular payments towards your debt, you may still be able to get a mortgage.

Here are some important things to know if you are applying for a mortgage while in debt:

  1. What is your gross debt service ratio?
    When you apply for a mortgage, your lender will look at your gross debt service ratio. This refers to your ability to make monthly debt payments. They will take into account the current monthly debt payments you’re making, and calculate your mortgage loan on top of that. For example, if your income allows you to pay out $1,000 per month, and you are already paying $500 in debt payments, that means you will only be able to pay $500 per month towards your mortgage. Usually $500 isn’t enough to qualify for a mortgage loan, so you may have to wait and focus on getting out of debt. However, if your income is large enough to cover both your debt payments and a monthly mortgage payment, then you may be able to qualify for a mortgage loan.

    Debt consolidation, which entails combining all your debt into one monthly debt payment, is often a helpful way to manage your debt. If you are paying off multiple credit card debts, as well as other loans and overdrafts, debt consolidation can help you manage your debt and even clear it faster.

    If you have a history of poor credit, debt consolidation can show lenders that you are taking steps to paying back your debts, and being a more responsible borrower.

  2. Are You An Ideal Borrower?
    There are many factors that might make you a non-ideal borrower. By identifying these factors, you can try to increase your chances of getting a mortgage loan. Some factors that affect your ability to be approved for a mortgage loan include:
    • Job status: Mortgage lenders like to see a consistent employment history. It may be more difficult to be approved for a mortgage if you have a history of frequently switching jobs, especially if you also have other debt. Mortgage lenders usually like to see at least two years’ of consistent employment. If you have recently gotten a new job in the same field, you can provide a letter from your current employer stating that your position is permanent.
    • Poor credit history: Unfortunately, being in debt can leave you with a bad credit rating that can take years to recover from. If you are determined to get a mortgage loan despite bad credit, you may be able to, provided you have someone who can co-sign, or act as a guarantor on your loan.
    • Multiple investment properties: While property investment can make you very successful, mortgage lenders are sometimes wary of lending to those who have more than three investment properties. While you may still be able to qualify for a mortgage, having multiple investment properties may affect your rates, making them higher. Additionally, if you have high debt and multiple properties, it will be more difficult to be approved for a mortgage.
  3. Declaring Bankruptcy
    If you have a great deal of debt, applying for bankruptcy may be the only option. Once you have declared bankruptcy you have basically declared that you are unable to pay off your debts. Any debt payments or wage garnishments will stop. Your present assets will be used to pay off your debts, you will have to follow specific bankruptcy restrictions, and you will have to attend meetings, hearings, and financial counselling sessions.

    Declaring bankruptcy is a serious decision that will affect your finances for many, many years to come. It should only be done if there are no other options. If you have declared bankruptcy once, you can expected getting any kind of loan afterwards very difficult. Usually you must wait two to three years after declaring bankruptcy to apply for a mortgage loan. Even after that, your finances will be subject to extra scrutiny, and you will probably have less mortgage options. If you have declared bankruptcy in the past and wish to apply for a mortgage loan, the most important thing is to spend time building up your credit score. Lenders usually require at least a year of satisfactory credit (that is, paying all your bills off on time) in order to even consider you for a mortgage loan.

Getting a mortgage when you are in debt is hard, but not impossible. Focus on ways to lessen your debt, such as debt consolidation, and on ways of improving your credit score. Speaking to a debt or mortgage professional can help you create a plan to get back on track, and get a mortgage.

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