Last Updated on July 29, 2021
Now more than ever people are purchasing homes on a single income. Canada’s current low interest rates are making housing more affordable, and programs such as Lincolnberg’s Rent to Own program are making it easier to transition from renting to homeownership. Many people are beginning to realize that they do not need a partner to start building home equity.
With only a single income source and credit history to pull from, however, it may be a little trickier to get through the mortgage process on your own. If you want to buy on a single income, there are some steps you can take to get approved faster.
9 Tips On Buying a Home on a Single Income in Alberta
Use the following tips to help you purchase your home without a dual income:
- Build a Downpayment
- Talk to a Financial Advisor
- Build your Personal Credit
- Find the Right Location
- Get Pre-Approved
- Make Note of Other Hidden Expenses
- Protect your Income
- Make a Plan for Possible Losses
- Buy a Home Withing your Means
Build a Downpayment
One of the most difficult parts of gaining homeownership is saving up for a downpayment while managing your everyday expenses.
Typically, a downpayment on a home ranges between 5% and 20% of its purchase price, but downpayments that are less than 20% will require you to purchase loan insurance. For example, a 5% downpayment on a house that costs $400,000.00 will be $20,000.00.
To save this money, many people will look into personal budgeting solutions to help cut down on extra expenses. Mobile apps such as EveryDollar, Goodbudget, and Fold can help you keep track of your spending by category and set goals to save each month.
If you are splitting off from a partner and you have equity in a shared home, you may also use your stored equity to finance individual homes. One partner can buy the other out of the mortgage, or both partners may decide to sell the existing home and invest the freed equity into two smaller homes.
For more tips on how to save for your downpayment, read 8 Practical Ways to Save For a Downpayment on a Home
Talk to a Financial Advisor
Buying a home is one of the largest purchases you will make in your lifetime, so why shop blindly?
Talking to a good financial advisor or planner can give you insights on how your purchase will affect your financial health later in life. A financial advisor can help you decide how much you should spend on a house responsibly to avoid problems if your employment or expenses were to suddenly change. They can review the preapproval requirements and your credit. This way you can develop a realistic timeline to achieve homeownership. If you have any items on credit that need rebuilding, the earlier you start the better. The advisor can also put a plan together to start building a down payment – for example, purchasing an RRSP using an RRSP loan may fast track your savings plan.
It is a good idea to talk to a financial planner before you even start your home search because they can help you align all of your mortgage components. The worst time to find out you’re not financially ready to buy is when you have already fallen in love with a home. A financial advisor can help you avoid the heartbreak of losing out on your dream home by making sure you are prepared and armed with the knowledge of your financial situation.
Build your Personal Credit
Ensuring your credit score is in good standing is one of the most important aspects of buying a home
When you are seeking mortgage approval, a stronger credit score will give you more options. For example, if you require additional funds for a down-payment, you can use a personal line of credit to supplement, or provide the full downpayment. However, you need a credit score above 680 to qualify for this option, so it’s important to build the highest score possible. If your credit score is low, your interest rate will be higher. A financial advisor can help you monitor and improve your credit score, but if you find that your score is lacking, try the following:
- Clear Your Debts. Prioritize clearing any outstanding debts sent to collections immediately
- Set Up Pre-Authorized Payments. Consider setting up pre-authorized transfers from your chequing account to your credit cards or loans. This is very important for a cell phone payment. Most cell phone companies now report to the credit bureau. If you’re only one day past billing, this will be reported to the credit bureau and will drop your score. Ideally set up your cell phone to debit your credit card monthly and have your credit card debit your account for the minimum monthly payment to ensure perfect repayment reporting.
- Lower Your Utilization Ratio. Make a plan to pay all of your outstanding debts to below 65% utilization (ie: if you have an outstanding $3,000 credit card, pay it down to below $2,000 immediately).
- No New Credit. Avoid applying for any new credit for 3 months before your mortgage application as credit enquiries temporarily lower your credit score.
Find the Right Location
Choosing the right location for your new home can have a huge impact on your living experience.
Ideally, your housing costs should not take up more than a third of your income. In most major, desirable cities, the average cost of ownership ratio is far higher than a third, but Edmonton’s average ratio as of December 2020 was the lowest of any of Canada’s major cities at 30%. Alberta also has the highest median after-tax family income out of all Canadian provinces.
Once you have chosen your ideal city, it is time to pick a community to call home. When choosing a community, you will want to consider how it will impact your lifestyle. Is it close to schools or childcare for your little ones? If you love the outdoors, does it have parks and trails to explore? Is it close to transit, groceries, medical care, and dining options? How easy is it for you to access services you use daily or get to work? These are all questions you will need to consider when choosing the community you want to live in.
Finally, you will have to examine the builders available in your top communities. Do they have programs available to help make homeownership easier for you? Do they have homes within your price range? Are they willing to make customizations to your home so that it fits your unique needs? Visiting showhomes, talking with sales advisors, and reading customer reviews will help you gauge whether the builder is a good fit for your project.
Lincolnberg Master Builder builds exclusively in master-planned communities that are designed to enhance day-to-day living. Download our community checklist to compare and visit our reviews page to find out what our clients had to say about their home building experience.
Read also: How to Choose The Best Community in Edmonton
Once you have built your credit, saved a downpayment, and chosen your perfect location, it is time to talk with a mortgage professional.
Getting pre-approved will expedite your purchase process, make your offer more attractive, and allow you to know exactly how much you can spend on a home.
This is a very important step to take before you buy a home, so make sure you choose a mortgage professional with a good reputation. View our list of approved mortgage lenders here.
Make Note of Other Expenses
Your mortgage and down payment costs are not the only expenses involved in buying a home.
There are several different types of closing costs to consider during your purchase. If you are buying a home outside Alberta, you will have to pay land tax, which is usually around 2% of your purchase price. If your downpayment is less than 20% of your home’s purchase price, then you will be required to have default insurance on the home. There are three providers of this mandatory insurance and while the insurance can be paid separately with your own funds, it is most commonly added to the mortgage balance at funding.
Other costs you may incur in the closing process are appraisal costs, inspection costs, legal fees, realtor fees if you are selling a previous home, new home warranty fees, and property tax adjustments. For a full breakdown of the different types of closing costs, click here.
The moving process is also an added cost that may be overlooked. You may have to take time off work, rent a moving truck, or hire movers to get you settled into your new home.
A good financial planner or mortgage professional should be able to help you understand and prepare for these fees ahead of time so that you are purchasing within your means. Putting together a budget that includes these costs early on will make your purchasing process less stressful.
Protect your Income
Those who purchase a home with less than 20 per cent down will require mandatory default insurance. This is a benefit for the purchaser because it allows you to mortgage up to 95% of the purchase price of a home. It also ensures you get a reasonable rate, even with your smaller downpayment, allowing you to start building equity sooner.
For many home purchases, most lenders will offer life and disability insurance. This is a valuable option that protects your investment. Consider what would happen if a critical illness struck or the breadwinner suffered a disability. There’s coverage for that, which can cover the mortgage or mortgage payments for a period of time through your life and disability mortgage insurance.
Having mortgage insurance is even more important when purchasing on a single income. If you have a life emergency, unexpected costs, or find yourself suddenly unemployed, mortgage insurance can help you continue to make payments so you do not lose your home.
Make a Plan for Possible Losses
Sometimes, when buying a home, things do not go as planned. Life is full of unexpected moments, and you may have unforeseen factors come up post-purchase that make it more difficult to make ends meet. Having a strategy in place to handle unexpected curveballs can help your homeownership transition go smoothly.
It is important to have a contingency plan or fund in place to help cover unexpected expenses as you become a homeowner on your own. Maybe your home needs a new roof, driveway, or furnace system? Perhaps you have to build a new fence or garage to live comfortably? Be aware that there will be unexpected costs, and try to plan for their arrival.
Buy a Home Within Your Means
One of the biggest mistakes you can make when buying a home is spreading yourself too thin financially. You may want the biggest and the best, but it is wise to stay within your financial means.
Your first home purchase on your own does not need to be your dream home. You will have time and funds down the road to invest in your forever home – you just need to start building equity in a home that fits your needs now first. Consider your current lifestyle when deciding how to spend your money. Do you spend all your time in the kitchen? Maybe choose a floorplan with an open concept main floor and save money on an unnecessary upstairs bonus room. Is your garage just for parking? Opt for a laned home with a rear detached garage on a smaller lot. Spend your cash on the things that matter most right now because you can always upgrade later on.
Just because you can scrape together every penny and get approved for a 500k home doesn’t mean you should. Purchasing beyond what you need will leave you with less in the budget for other things. It is easier to recover from a sudden financial setback when your income isn’t all tied into your home.
Curious to find out how much you can afford? Try our free Affordability Calculator tool to get an instant estimate!
Frequently Asked Questions
How can I buy a house with a single income?
The short answer is that it requires some planning and preparation, but can be done. You should start by meeting with a mortgage professional or planner and discussing your budget and pre-approval needs and come up with a plan to reach your ownership goal.
Professionals have seen every situation and will know how to guide you on your path, and will be able to help you make the right decisions.
How much money do you need to buy a house in Alberta?
For an average Edmonton home costing around $343,300.00 (2019 estimate), you would need a minimum downpayment of around $17,165.00 and a household income of $70,000.00/year to take out a mortgage.
It is possible to purchase a home with a lower annual income if you can put down a larger downpayment or purchase a smaller starter home such as a condo.
Can a single person afford a mortgage?
It can be more difficult for a single person to afford a mortgage, especially if they make under $70,000.00/year. That being said, single people can sometimes leverage the sale of a joint house after a breakup to put down a large downpayment on a smaller home, which means that the income requirements are slightly lower.
Single people can also rent out extra space in a home they purchase such as a basement suite, spare bedroom, or garden suite, and use the expected future income from the rent to qualify for a home.
What credit score is needed to buy a house in Alberta?
There is technically no minimum credit score for private lenders, as it is up to them to decide who they finance. However, a mortgage through a private lender will often have sky-high rates and can leave you in a bad financial bind.
A credit rate of 600 or higher will net you the best interest rates from the bank at around 1.5-2%, and with a score of 550 you can likely secure a mortgage through a b-lender at a slightly higher rate.
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