4 tips for buying a home on a single income

In today’s market, with high interest rates and volatile inflation, the mere thought of making a home purchase on your own might seem out of reach. However, with home prices dropping, rates holding steady since July, and fixed rates lowering, the path ahead is looking a lot brighter for homebuyers, especially those entering the market for the first time. If you are planning on purchasing a home this year on a single income, there are four key things you can do to be prepared, in spite of this economic backdrop.

1. GET A MORTGAGE PRE-APPROVAL

Understanding what you can afford before starting your home search is one of the most important steps you can take, especially if you’re buying on a single income. A mortgage pre-approval, which is less formal than securing an actual mortgage, is when a lender assesses your financial situation to determine how much you can borrow and an estimate of what your monthly payments will be. If granted, the lender will commit to loaning you a specific amount of money over a 120-day period. However, this is not 100-per-cent set in stone and may not convert to an approval when you’re ready to buy.

While a pre-approval is not mandatory, it offers several advantages to prospective homebuyers. It ensures financial preparedness, it offers meaningful insights into your affordability so that you can set a realistic budget to guide your home search, and it eases the stress of the process. If you’re making this investment on your own, extra steps like a pre-approval can help you to understand your finances better as well as where you might need to improve to make your home purchase with confidence.

2. MINIMIZE YOUR DEBT TO IMPROVE YOUR CREDIT

Before making any sudden moves, it’s crucial to get your finances in order, starting with any outstanding debt you may have. Your debt-to-income ratio, which is the comparison of your monthly debt payments to your monthly gross income, is a significant factor lenders look at when reviewing your mortgage application. By clearing your credit card debt and paying down loans, whether they’re student loans, auto loans or other types, you not only improve your chances of getting approved for a mortgage but ensure your financial stability to manage the additional expenses that come with homeownership.

It’s also essential to avoid taking on any large purchases or additional debt before you’re approved for a mortgage. This can significantly impact your debt-to-income ratio and credit score, potentially affecting your loan terms or your ability to qualify for a mortgage at all.

3. DON’T SPEND ALL YOUR MONEY ON A DOWN PAYMENT

When it comes to making a home purchase on your own, a down payment can feel like one of the biggest financial hurdles to overcome. And while it is important and can help to reduce your monthly mortgage payments, it’s one of the many costs associated with buying a home. In addition to your down payment, homebuyers on a single income also need to budget for closing costs, property taxes, maintenance, the cost of furnishing the home and CMHC home insurance if you make a down payment that is less than 20 per cent. A well-thought-out budget will ensure you’re not stretching yourself too thin so that you can enjoy your new home without financial stress.

4. SHOP AROUND FOR A MORTGAGE

When shopping for a mortgage, many Canadians typically default to their home bank without exploring other options. However, when making such a significant financial commitment, it’s important to shop around and understand what’s available in the marketplace before making a decision. At Homewise, we work with more than 30 banks and lenders, including credit unions and monoline lenders, which often provide more competitive rates and features than traditional banks. Given that everyone’s financial situation and goals vary, finding a mortgage that aligns with your unique needs and goals is crucial. This includes understanding the specifics of prepayment privileges and penalties, which are essential for adapting to life’s changes.

For instance, if you’re buying a home on a single income and later enter into a relationship with the desire to make a lump sum payment on your mortgage, your ability to do so is dependent on the terms of your mortgage contract. This underscores the importance of reading the fine print and fully understanding the details of your mortgage agreement to ensure it not only fits your current needs but also potential future scenarios.

Regardless of the economic environment we’re in, buying a home on your own is possible and a goal within reach if you are financially prepared, leverage the proper tools available to you, and seek advice from mortgage professionals such as those on our team at Homewise.