Understanding Debt and Its Impact on Mortgage Approval

Kelly Hudson • March 13, 2024

Securing a mortgage significantly depends on your credit score and debt load. Understanding how different types of debt affect mortgage affordability is crucial.


Debt falls into two categories: secured and unsecured. 

  • Secured debt, backed by collateral like a house or car, provides lenders security in case of default. 
  • Unsecured debt, such as credit cards, lines of credit, and student loans, poses higher risk for lenders and typically carries higher interest rates.


Here's how different types of debt influence your credit score and mortgage approval:

  1. Credit Cards are unsecured debt, offering revolving credit lines with interest rates based on creditworthiness. Responsible credit card usage can positively affect credit scores, but defaults or late payments can lead to higher interest rates and decreased creditworthiness.
  2. Line of Credit: Like credit cards, lines of credit are unsecured and provide borrowers access to a predetermined credit limit. Responsible use can improve credit scores, while defaults can have negative credit repercussions.
  3. Student Loans: Despite being unsecured, they can enhance credit scores if paid on time. They contribute to the debt-to-income ratio.
  4. Auto Loans: Auto loans are secured debt, with the vehicle serving as collateral. They can diversify debt portfolios and improve credit scores. 
  5. Existing Mortgage Loans: Secured by the property, timely payments enhance credit scores. Missed mortgage payments raise red flags for new lenders.


Maintaining a balanced mix of debt types strengthens credit scores and mortgage eligibility. However, over-borrowing can be harmful.

Mortgage lenders aim for a debt-to-income ratio below 43%, considering all your debts. Ensuring income covers all payments is crucial for approval.


Understanding debt intricacies is vital for navigating the mortgage application process. Ideally, less debt means a bigger mortgage, since more of your income can go to cover your mortgage payments.

  • For instance, a $500/month auto loan decreases your mortgage affordability by about $100K.


Practicing responsible borrowing and effective debt management increases chances of securing the needed mortgage for homeownership goals.


Whether it's a new home, investment property, or refinancing, I have the knowledge and experience to guide you towards the right mortgage solution. 


Are you thinking of buying a home? As you can tell there is lots to discuss, let’s have a chat!


Kelly Hudson

Mortgage Expert
Mortgage Architects
Phone 604-312-5009
Kelly@KellyHudsonMortgages.com
www.KellyHudsonMortgages.com

Kelly Hudson
MORTGAGE ARCHITECTS
RECENT POSTS 

Mortgages Made Simple: Understanding Fixed vs. Variable Interest Rates in Canada

By Kelly Hudson • March 17, 2025
Since March 2022, mortgage rates in Canada have risen significantly, raising concerns for homeowners and potential buyers. But what drives these changes, and how do they impact your choice between fixed and variable mortgage rates? Let's simplify this important financial topic.

Getting a Mortgage After Separation or Divorce in Canada: What You Need to Know

By Kelly Hudson • February 14, 2025
Separation and divorce are major life events that significantly impact finances—including homeownership. In Canada, approximately 40% of marriages end in divorce , making it a common challenge for homeowners. As a mortgage broker, I work with many clients who are navigating the challenges of keeping or selling their home, refinancing, or qualifying for a new mortgage post-separation. Lenders assess these applications differently than standard ones, particularly when it comes to income, debts, and liabilities . Whether you want to stay in your current home or move on to a new one, understanding your mortgage options is essential. How Separation & Divorce Impact Your Mortgage When separating from a spouse, one of the biggest financial decisions is what to do with the family home. Here are some common scenarios: 1. Keeping the Home If one spouse wants to stay in the home, they must refinance the mortgage to remove the other person’s name from title and buy out their ex’s share of the equity. 2. Selling the Home In some cases, selling the home and splitting the proceeds is the best financial option. This provides a clean break but requires both parties to qualify for new mortgages if they wish to buy separate homes. 3. Co-Owning After Separation Some ex-partners choose to co-own the home for a period, often for the sake of stability for children. While this may work temporarily, it will complicate future borrowing power . 4. Existing Mortgage Responsibilities Even if a separation agreement states that one party is responsible for the mortgage, lenders will still consider both parties liable unless the mortgage is refinanced and the ex’s name is removed from the title & the mortgage. Important : If both names remain on the mortgage and your ex stops making payments, your credit score and future borrowing ability will be affected .
Share by: