At a time when many young adults are postponing marriage, the number of Americans buying a house on a single income is growing. According to the mortgage software firm Ellie Mae, as many as 47% of Millennial homebuyers last year were indeed unmarried.
Because single mortgage applicants rely on just one salary and one credit profile in order to secure a loan, getting through the underwriting process can be a bit trickier than with two incomes. However, the more you understand about what the process entails, the better your odds will be of getting a lender to say “yes.” Here are four crucial things that can help buy a house on a single income.
- Before applying for a mortgage, review your credit report and avoid any credit-busting major purchases
- As an alternative to the conventional mortgage, consider a government-insured loan if you have trouble making the down payment.
- Having a co-borrower on the loan can sometimes help you clear the underwriting hurdle.
- Ensure your ability to make those monthly payments through products such as mortgage protection life insurance.
1. Check Your Credit
When you apply for a mortgage on your own, lenders will be looking at just one credit profile: yours. Needless to say, it has to be in great shape.
It is always a good idea to review your credit report beforehand, and this is especially true of solo buyers. You can get a free copy once a year, from all three credit bureaus at the website AnnualCreditReport.com. In addition, many banks and financial companies will make available your credit score for free if you are an existing customer.
Make sure that your credit report does not contain any mistakes that will make you look like a bigger risk than you really are. If you see anything amiss, contact the credit reporting company right away so it can investigate on your behalf.
You will also want to avoid doing anything that could hurt your credit, such as making big credit card purchases right before or after you apply for a home loan. And think twice before canceling any old credit cards. You might think you’re helping your cause, but you’re actually reducing the average age of your accounts and lowering your credit utilization ratio, two things that could hurt your application.
Mortgage lending discrimination is illegal. If you think you've been discriminated against based on race, religion, sex, marital status, use of public assistance, national origin, disability, or age, there are steps you can take. One such step is to file a report to the Consumer Financial Protection Bureau and/or with the U.S. Department of Housing and Urban Development (HUD).
2. Look at Government Loans
A conventional mortgage typically requires a 20% down payment, something that can be hard to do if you’re drawing on only one person’s savings. If you can afford it and are thinking of applying for a conventional mortgage as a single person, take some time to compare interest rates, and mortgage types to decrease the amount of interest you'll ultimately pay.
However, if you are struggling to come up with a down payment, as an alternative to the conventional mortgage, consider a government-insured loan. Government-insured loans have a much smaller requirement—and sometimes none at all. For example, the popular Federal Housing Administration (FHA) mortgage program only requires as low as a 3.5% down payment. And if happen to be a veteran or active member of the military, a Veteran’s Administration (VA) loan lets you finance the entire amount of the purchase, so long as it doesn’t exceed the appraisal value of the property.
Caveats come with government loans: FHA mortgages require you to pay an upfront mortgage insurance premium (which can be financed) as well as a monthly premium; VA loans assess a “funding fee” that can either be spread out over the course of the loan or paid in cash.
While low-down-payment requirements can help open the door to homeownership, they do carry risks. For example, paying 3.5% down doesn’t give you much of an equity buffer if the stock market takes a hit soon after you make the purchase. Putting down a little more, say 10% of the loan amount, will give you a little more peace of mind.
3. Put Someone Else on the Loan
Having a co-borrower or guarantor on the loan can sometimes help clear the underwriting hurdle, especially if you do not have a very long credit history. The lender will look at the co-borrower's income, assets, and credit history—and not just yours—when assessing the application. Your co-borrower can not only help you qualify, but also score you better terms on the loan. Bear in mind that your co-borrower will become responsible for the payments and will hold a joint title of the property with you if you fail to keep up on your mortgage.
While they may be doing you a huge favor by joining you on the loan, make sure the co-borrower knows the consequences. In the event you have trouble making your loan payments, the bank can go after the co-borrower, too. If you don’t want to worry about that, you should wait until you can qualify for a loan by yourself.
4. Protect Your Income
That first monthly mortgage payment can be startling for younger homeowners unaccustomed to such a big bill. As single home buyers rely on one source of income to pay the lender, it’s a good idea to take out some protection. If your employer either doesn’t provide disability insurance or offers only a bare-bones plan, you might consider looking into more robust coverage on your own. That way you’ll get help paying your bills should you experience an illness or accident.
A specialized product known as mortgage protection life insurance can also help take care of your mortgage payments if you become unable to work. It’s only intended to help with home loan payments (some policies are a bit more flexible), so it’s not a comprehensive financial solution. Still, because it typically has a looser underwriting process, it’s an option for those with riskier jobs or poor health, who consequently have trouble finding affordable disability coverage.
The Bottom Line
Thanks to low-down-payment programs, you need not be well-heeled to get a mortgage on your own. However, it does require having a sparkling credit report and making sure that you have sufficient income protection. Government-insured loans and co-borrowers can also be of help.