If you’re hoping to buy a home on a single income, you should know that it isn’t impossible. However, solo-income homebuyers do face some unique challenges. Read on to find out how to buy a home on one income.
The Hurdles of One-Income Homebuying
It’s no secret that buying a home requires a significant financial investment: The median sale price of homes in the U.S. was $423,600 as of the fourth quarter of 2021. That’s why it’s common for people to wait until they’re in a relationship before buying a home. In 2021, 62% of recent homebuyers were married couples, and 9% were unmarried couples, according to the National Association of Realtors (NAR). With two incomes, it’s easier to qualify for a mortgage and afford a bigger loan. Plus, there’s also more financial security if one person loses their job. But that doesn’t mean you need a partner to buy a home. According to the same NAR report, 18% of people who bought homes in 2021 were single women, and 9% were single men. Plus, being coupled up doesn’t necessarily mean you have two incomes. The Federal Reserve Bank of St. Louis conducted a household-earner study that spanned 2020–2021; of married-couple families, only around 50% were two-earner households. There are two significant challenges when buying a home on a single income, according to Laura Adams, the senior real estate analyst at Aceable. The first is saving enough for a down payment, and the second is qualifying for a sufficient mortgage. The required down payment for a home loan varies based on the property you buy and your lender, but it typically ranges from 3% to 20% of the purchase price. If you put down less than 20% on a conventional loan, you may be required to pay for private mortgage insurance (PMI), which increases your monthly payment amount. To avoid PMI on a home that sells at the median price of $423,600, you’d need to save more than $84,720 for a down payment. With a single income, it could be tough to save that much within a reasonable amount of time. When it comes to the actual loan, having only one income may affect your ability to get approved at the lowest possible interest rate and monthly payment, Adams told The Balance in an email. When two people apply for a mortgage together, the lender considers both their incomes and financial profiles when determining how much they can afford to borrow. “Lenders view a household with more than one income as less risky than a single borrower,” Adams said. You may also be stuck with less than ideal mortgage terms if you don’t have strong credit—or if your partner doesn’t, even if they don’t have any income. “Lenders typically use an average of your combined scores” to evaluate your application, Adams explained, and some lenders even use the lower of the two scores.
Is It a Good Idea To Buy Solo?
“Whether buying a home on one income is a good idea depends on your financial situation and goals,” Adams said. If you can make a sufficient down payment, maintain a healthy emergency fund, and minimize other debts, there is no reason you cannot become a homeowner. On the other hand, if you have limited cash reserves, inconsistent income, or a “fair” credit rating, you may end up with a more expensive mortgage (if you’re approved at all). If you were to lose your job, you’d be in greater danger of defaulting on the loan because you wouldn’t have a second income to fall back on. You should also consider how long you plan to live in an area. “If you’re unsure if you’ll remain in a home for at least three to five years, renting may be a better choice,” Adams added. That’s because there are costs associated with buying and selling homes. If you live in your property for a shorter period, you may not build much equity, or you might lose money on expenses associated with moving, such as mortgage prepayment penalties.
How To Buy a Home on a Single Income
If you’re comfortable with the risks of buying a home on a single income, you can begin preparing to apply for a mortgage. Below are the steps you should take, whether you’re applying as a single-income household or solo borrower.
1. Build Your Credit
Your credit is one of the most important factors a lender considers when deciding whether you qualify for a mortgage, according to David Bitton, the co-founder and chief marketing officer of DoorLoop, a property management software company. Most conventional loans require a credit score of at least 620. Before applying for a mortgage, review your credit reports for any errors or negative marks that could bring your score down. Keep in mind that even if your score is above 620, it can be beneficial to boost it even more before applying. “A higher credit score will help you qualify for competitive interest rates and loan terms,” Bitton explained in an email to The Balance. If possible, aim for a score of at least 740, which is considered very good and will allow you to qualify for the best rates.
2. Save for Your Down Payment
Making a substantial down payment will help decrease the risk you present as a borrower and make your loan more affordable. “If you can save at least 20% for a down payment, your chances of approval will be significantly increased,” Bitton said. Plus, you won’t have to pay PMI. And when you borrow less, your monthly payments and interest costs are lower.
3. Pay Down Debt
To demonstrate to the lender that you can make payments, Bitton said you must have a low debt-to-income (DTI) ratio. This ratio measures how much of your monthly income goes toward repaying debt obligations. Many lenders follow the 28/36 rule, meaning your maximum housing expenses (including mortgage payments, property taxes, and insurance) should not exceed 28% of your gross income. Likewise, your total existing debts should not exceed 36% of your income. Some lenders might accept a higher DTI. However, you’ll improve your chances of getting approved with one income if your debt levels are low. Consider paying down any outstanding credit card balances or loans before applying for a mortgage.
4. Get Pre-Approved
Before you spend too much time searching for your dream home, it can be helpful to get a mortgage pre-approval. This document tells you exactly how much you can borrow and on what terms so you don’t waste time pursuing a property that’s ultimately out of your price range. “Additionally, a mortgage pre-approval may carry weight with a potential seller evaluating multiple offers,” Adams said. Sellers like to know that the buyer’s financing is secure and the sale will go through quickly. “The sooner you start the pre-approval process, the smoother your real estate transaction may be.”
5. Consider a Co-signer
If you have a trusted family member or friend with good credit and a steady income, you could ask them to co-sign your loan. A co-signer is someone who essentially guarantees your debt and is legally responsible for repaying it if you can’t. Keep in mind that co-signing a loan is a major financial responsibility, and the co-signer can end up in a tough spot if you fail to make your payments. So, if you go this route, be sure the co-signer understands the risks and is comfortable with them.
6. Look for Government Programs
If you’re struggling to save enough for a down payment on one income, Adams said you should consider a government-insured loan. For example, a Federal Housing Administration (FHA) loan requires as little as 3.5% down, depending on your credit score. Or, if you’re a service member, veteran, or military spouse, you may qualify for a zero-down Veterans Administration (VA) mortgage. The interest rates and terms on these loans also tend to be more favorable. You might also qualify for government programs that assist first-time and lower-income homebuyers. For example, you may be eligible for down-payment assistance.
The Bottom Line
The costs of homeownership are often easier to handle on two incomes. However, it’s still possible to buy a home on one income. Keep in mind that you might have to set your sights on a less expensive home. You’ll also need to take extra steps to make yourself an attractive borrower and keep the costs of your loan as low as possible.
