News / National

6 Steps for Buying a Home on a Single Income

June 30 2021

Buying a home on a single income is not easy, but it can be done. It will take discipline and some saviness to achieve homeownership solo. You can do it, and here’s how:

Make a Budget and Review Finances

If you are in the early stages of saving for a home, a great place to start is with a budget and a review of your finances.

Budgeting

Track your spending for three months and note any areas where you might be overspending and adjust accordingly.

Many sources recommend following the 50/30/20 rule when creating a budget. This allocates 50% of your income for essential items like hydro, food and rent/mortgage. Discretionary spending, like clothing, travel, and entertainment, accounts for 30%. This leaves 20% of your income for savings.

Example: If your monthly net income is $3,000, you will have $1,500 for essentials, $900 for discretionary spending, and $600 for savings. Over the course of a year, you would save $7,200. Over a 10-year period, you would save $72,000, which would be a 20% down payment on a $360,000 mortgage.

Remember, if you already own a home, you can use equity from that home towards your down payment.

Financial Review

Two types of debt ratios will be reviewed when you go to the bank to get a pre-approval: Gross Debt Service (GDS) and Total Debt Service (TDS).

GDS is used to assess what percentage of a homebuyer’s monthly gross household income is being used for housing debt, which includes mortgage payments, property tax payments, home insurance, condo fees, and utility bills. The Canada Mortgage and Housing Corporation recommends a ratio of 35% or less for GDS.

TDS is the percentage of your monthly household income that includes GDS and any other debts. Other debts could include student loan repayment, car loans or leases, lines of credit, and credit card debt. TDS should be at or under 42%.

Example: If your monthly gross income is $4,000, a 35% GDS would result in $1,400 for essential home bills. For TDS, you have 7% of your household income for all other debt, which in this example would be $280.

The example demonstrates that it is harder to buy a home when you have existing non-household debt. If you have debt, it is recommended you pay this off before taking on a mortgage. Use a large portion of your 20% savings to pay off your high-interest debt as soon as possible. You can use the CMHC Debt Service Calculator1 to compare your monthly debt payments and housing expenses to your gross household income.

Speak to a Financial Advisor

Once you know where your money is going and you have savings, or at least a plan in place, speak to a financial advisor about your homeownership goals. They will likely recommend you invest your savings in low-risk mutual funds or stocks or put your money in a TFSA for some interest rate return. You will have the option of putting your money in moderate to high-risk investments, which could have large return, but also is a greater risk to your savings. Your tolerance for risk won’t likely be high when it comes to saving for a home.

Keep Excellent Credit

Having good credit is important when buying a home in any situation, but especially when purchasing a home on your own. If you already have great credit, that’s awesome – keep up the good work. If you have poor credit, you need to work on repairing your credit score by always paying your bills on time. Your credit will be checked as part of the mortgage pre-approval process and will impact your application.

Get a Pre-approval

When you have a stable income, good credit, and a sizeable savings account, visit your mortgage rep to get a pre-approval. The pre-approval will tell you how much you can afford and give you an idea if you need to save more for a larger down payment (and purchase price) or if now is the right time to start house hunting.

It is possible that an a-lender, aka one of Canada’s six big banks, may not approve you for a mortgage. At this point you can consider going with a b-lender, which would be a bank or credit union not part of the “big six” or a c-lender which is an unregulated or private lender. These lenders have lower qualifications and higher interest rates; be sure to read the fine print and do the math. It may be worth spending more time saving for a larger down payment or getting a more stable income source in order to borrow from an a-lender.

Stretch your Dollar Further

Now that you have a pre-approval you can start shopping. But where? Your location will be largely based on what you can afford, and what you can afford may force you to consider moving out of the city centre into a more affordable area. This would allow your dollar to go further regarding square footage and possibly quality.

If you want to stay in a larger city, you will likely have to sacrifice some square footage and quality and may need to consider getting a roommate to offset the mortgage cost. Renting a room or two in your home is a great way to make homeownership more affordable, while solely enjoying all the appreciation in your home value over time.

Purchase for your Current Lifestyle

The benefit of being a solo purchaser is you don’t have to consult another person on what to buy – it is all up to you. Purchase a home that suits your current lifestyle. Consider pets, dependent children, and hobbies when selecting a home, but remember, this home won’t likely be your “forever home” and it is okay to be flexible in the early stages of homeownership.

Once you own a home, that home will appreciate over time, which allows your next home as a solo owner to perhaps be a littler nicer and in a more preferred area. Or the next home you purchase may involve another person, whether that be a romantic or platonic partner.

Are you ready to purchase a home solo? Purplebricks can help. With Purplebricks, find the ideal home for you and get $2,000 with our Fair and Square Cash Back program!* We pair you up with a Home Buying REALTOR® in your neighbourhood whose only job is to find the perfect home for your needs. If you’re ready to take the next step and find a REALTOR® to help you look, visit our Home Buying Experience page today.

Give us a call at 1-855-348-1820 and we’ll get you started
Sources:
  1. CMHC Debt Service Calculator