Thinking about buying a home on a single income? It's a big decision, but it's not impossible. With the right planning and resources, you can make your dream of homeownership a reality. Here are tips to get you into the home of your dreams.
Are You Credit Worthy?
When you want to purchase a home, lenders look at your credit report and credit score to determine your creditworthiness. A credit score is a three-digit number that includes repayment history, types of loans, length of credit history, debt utilization, and whether you’ve applied for new accounts. This three-digit number determines the likelihood of you paying back your loan based on your credit history as compiled by Equifax, Experian, and TransUnion. Lenders look for a credit score of 620 and higher.
If your credit score is lower than 620, here are a few ways to improve it.
- Pay all your bills on time
- Pay down all debt
- Do not apply for new credit cards
- Diversify the types of credit you have (e.g. credit cards, auto loans, student loans)
Your credit score is crucial, but it's not the only thing mortgage lenders look at. Factors like income, employment history, and debts play a big role in their decision. Stay informed and increase your chances of getting that dream home!
Kris Farwell, Director of Mortgage at Coulee Bank says, “As lenders, we assess your income and employment history going back two years. Your income helps lenders determine how much mortgage you can afford. Our goal at Coulee Bank is to set you up for success!” She also mentions the importance of your Debt-to-Income Ratio (DTI).
What is DTI and How is it Calculated?
Farwell says, “An easy way to figure your DTI is by dividing your monthly debt payments by your gross income. The goal is to have a low DTI. As lenders, we like to see a DTI of 36% or lower.” She encourages you to consult with a lender at Coulee Bank to determine your actual number. There are other programs you may qualify for that have more flexibility.
After consulting a lender, if your DTI is still too high try these tips:
- Reduce your monthly recurring debt
- Avoid taking on new debt
- Consolidate debt
- Create a budget and follow it
- Take into consideration any other recommendations your lender may suggest
Consider Putting a Down Payment on a Home
A down payment is the initial payment you make when purchasing a home. It shows you are committed to becoming a homeowner. For a conventional loan, consider a 5% down payment. Don’t be discouraged if you don’t have the cash for a 5% down payment because some programs allow you to put as little as 0% down. Set yourself up with a down payment by saving a little each month. Farwell says, “While saving money for this down payment, you can also find someone willing to help with a gift fund. Parents or grandparents may have a small nest egg they can gift you as a birthday or holiday present.”
If you don’t foresee a monetary gift, a co-signer, often a friend or family member, may help you qualify for a loan. Remember, if you have a co-signer, they are not responsible for payments but are responsible if you miss a payment. If you miss payments, it could hurt the co-signer’s credit score.
Remember to talk to a local lender at Coulee Bank to find out about down payment assistance programs. There are first-time homebuyer loans, grants, and low-interest loans to make homeownership a reality.
Some common types of down payment assistance include:
- Grants-don’t need to be repaid, but often come with repayment requirements.
- Low-interest loans-repaid along with your regular mortgage payment over time.
- Deferred loans-don’t charge interest until you sell, refinance, or the mortgage reaches the end of its term.
- Forgivable loans-expire after a certain period.
For more information on down payment assistance programs, read this article from Rocket Mortgage.
Roommate to the Rescue
If you are set on buying a house, but don’t have the down payment, consider a roommate to help you with the monthly mortgage payment. You are responsible for qualifying for the loan, but a roommate can help supplement the monthly mortgage payment. Determine if you want them to pay separately for utilities or one lump sum. Have a backup plan, like an emergency fund, if that roommate bails sooner than expected.
If you have a roommate, even if it is your best friend, there are taxes on the income you receive from your roommate. You are officially a landlord at this point, and it’s an important step to filing your taxes correctly.
You may also need this emergency fund for any maintenance your new home may need, a car repair, or any other emergency you may experience. Consider saving part of your down payment for the emergency fund.
Get Pre-Approved
If you want to be taken seriously as a homebuyer, get pre-approved. It shows buyers you are interested, and it gives you an idea of how much home you can afford. There’s nothing worse than finding your dream home and then realizing you can’t afford it. This is an easy process your mortgage loan officer can help you with.
The documents you need vary based on the loan you’re applying for and your financial situation, for instance, if you’re self-employed, paid hourly, or get commissions or bonuses. Consult a loan officer at Coulee Bank to discuss what you need to provide during the application process.
Ready to purchase a home? Contact a responsible real estate agent and mortgage loan officer. There are new rules that will allow you to “hire” someone to represent you, as a buyer, and make sure your questions are answered before looking for a house. Farwell says, “You may want to get a referral for these individuals to help you purchase a home. You want someone to have your best interests in mind.”
Reach out to Kris Farwell and her team if you are ready to purchase a home.
Coulee Bank. Bank with Confidence. Member FDIC. Equal Housing Lender.