In our post about co-owning a house, we explain how prospective buyers can enter the housing market early by sharing a property. Buying a house with a partner, family member or friend lessens the financial burden of homeownership. Co-owning a house usually means lower monthly mortgage payments, annual property tax payments and maintenance costs for each person involved. However, not every prospective home buyer is interested in co-owning a house. Unfortunately, single home buyers often encounter more obstacles than married or coupled buyers. Single buyers rely on one credit score and one source for a down payment. They are also wholly responsible for learning everything they need to know about their new home, which can be difficult in a historically opaque industry. This is especially true for single home buyers who are self-employed. In this post, we explain why buying a house on a single income can be more complicated than buying with a partner. We also offer a few tips for making the process a little easier. Follow below if you plan to buy a house on a single income.
Here’s What It Takes to Buy a House in the US in 2022
Anyone who considered buying a house in 2021 knows that record low interest rates and low housing supply created an incredibly hot sellers’ market. With few homes available and nearly unprecedented demand for those homes, bidding wars broke out all over the country. In her September 2021 article “Meet the typical American homebuyer” for BusinessInsider, Hillary Hoffower elaborates. Hoffower writes that “nearly 60% of homebuyers made two or more offers [in 2021].” This was “up from 42% in 2020.” Nearly a third of all buyers exceeded their budget, “especially those paying with a mortgage rather than all cash.” Almost all home buyers paid the asking price, while 29% paid more than the asking price.
According to Anna Bahney in a January 2022 article for CNN Business, “home prices in 2021 rose 16.9%, the highest on record.” Bahney notes that the median purchase price in 2021 was a shocking $346,900 USD. Of course, homes sold for much more in states like California and Massachusetts. In Massachusetts, the median sale price for a single family home in Massachusetts was $500,000 in October. An article from The NYT notes that the “median sale price of a single-family home in California was $798,440” that same month. Clearly, prospective home buyers already face a series of challenges. Those who enter the housing market without a spouse or other co-owner often find themselves in an even less hospitable environment.
How Much Do You Need to Make to Buy a House?
Few lenders explicitly define a minimum income for mortgage applicants. However, most mortgage lenders will consider each applicant’s DTI or debt to income ratio before approving a home loan. They also consider the consistency of your income, which can be an issue for single home buyers who are also self-employed. Of course, how much you need to make to afford a mortgage and other costs associated with homeownership varies from state to state. Many of our readers live in California. As such, we will first take a look at how much buyers would need to make in the Golden State.
In his 2021 article “Salary Needed to Afford Home Payments in the 15 Largest U.S. Cities – 2021 Edition” for SmartAsset, Ben Geier, CEPF® considers homeowners in San Jose and Los Angeles, California. Geier writes that “homeowners in San Jose, California…have to earn $143,233 (with no debt).” They must meet this threshhold in order “to afford a property with a median home value of $999,900.” Homeowners in Los Angeles with zero debt “need to earn at least $98,333 to make home payments.”
Income Needed by an American Home Buyer with a Typical DTI Ratio
If you have any medical debt, credit card debt or student loan debt – which most prospective buyers do – the minimum income needed increases. According to a survey conducted by LendingTree, “Americans pay $1,233 toward debt each month, on average.” Writing for The Balance in her article “How Much Income Do You Need To Buy a House?,” Jessica Walrack explains how debt affects how much you need to make each year to get a mortgage. Walrack notes that most borrowers will only approve a mortgage if the applicant has a DTI ratio under 36%, though they might accept a higher percentage if the applicant exceeds other minimum requirements. When applying for a government insured loan — like an FHA (Federal Housing Administration) loan — you can have a maximum 31% housing debt to income ratio.
With this in mind, Walrack breaks down how much income you would need to secure an FHA loan for a home “priced at the current US median of $374,900 USD.” You would need a $7,940 monthly income or $95,283 annual income to afford a $375k home purchase with a 31% DTI. You would need to put down at least $13k if you have a 580+ credit score. If your credit score is less than 580, you will need a down payment of at least $37k when buying a $375k house.
Average Annual Income of Full-Time Workers in the US
According to ZipRecruiter, the average annual income of an LA resident who works full-time is only $68,118 USD. In San Jose, the typical full-time worker makes $69,527 USD. Both exceed the annual salary of the average American worker, who makes $51,480 each year. In a recent article for The Balance, Rachel Morgan Cautero noted that the average Millennial makes less than the average American worker – only $47,034 each year. Below, we consider how the annual income of the average worker compares to that of the typical home buyer.
Profile of the Average American Homebuyer
The median household income for an American family was $67,521 in 2020 according to the US Census Bureau. However, the median household income of a typical homebuyer was just about $86,000 last year. In her September 2021 article “Meet the typical American homebuyer, who is middle-aged, lives in the south, and went way over budget for their house” for BusinessInsider, Hillary Hoffower explains the difference.
Hoffower writes that “considering the average age of the typical homebuyer [is 45], out earning the US population makes sense.” Those with a college degree are also more likely to own a home, as are married couples. According to Hoffower, “marriage is ‘strongly correlated’ with buying a home” – especially for lower-income Americans. In the article “How To Buy a Home on One Income” for The Balance, Casey Bond writes that “62% of recent homebuyers were married couples and 9% were unmarried couples” in 2021.
Why Buying a House Might Be Harder If You’re Single
Saving Up for Closing Costs and a Down Payment Takes Longer
Saving enough money for a down payment and closing costs usually takes longer for prospective home buyers with a single income. In her article “Buying a home is a lot harder if you’re single” for CBS News, Kate Gibson provides a few statistics. According to Gibson, it takes a couple “less than five years to save the 20 percent down payment on a typical U.S. home” while it takes single buyers nearly eleven years. Gibson writes that it would take a single buyer in San Jose, California “more than 30 years to save enough for a down payment,” which is longer than the lifetime of most mortgages. Across the United States, the typical single buyer could only “afford to buy 45% of available homes” whereas couples with two incomes could afford 82%. Unfortunately, inexpensive homes are in much higher demand than expensive homes. For single buyers, this means more competition.
When buying a home, there are more housing costs to consider than just a down payment and monthly mortgage payments. One must also budget for closing costs – which the buyer typically pays –, property taxes, maintenance costs and homeowners insurance. Those who put down less than 20% of the home’s purchase price must also budget for monthly payments to their mortgage insurance provider. Buying your dream home on a single income means you cannot divide your monthly payment amount amongst co-owners. Single buyers are solely legally responsible for the down payment, property taxes, closing costs and monthly mortgage payments.
Lenders Scrutinize Self-Employed Applicants
Saving up for home improvements, a down payment and closing costs is hard enough for a buyer on a single income. Meeting minimum DTI ratio requirements can also be a challenge. If you are both single and self-employed, securing a mortgage gets even harder. With a standard W-2, reliable monthly income stream and a boss to interview, mortgage lenders typically believe full-time employees have more financial security than workers who are self-employed. Perceived as higher-risk, a self-employed applicant thus faces greater scrutiny when they apply for a mortgage than an employed worker who also has one income.
An applicant who recently started their own business is considered even riskier. In her article “The huge hurdles self-employed people face when they try to buy a home” for MarketWatch, Lindsay Goldwert explains. Quoting Massachusetts realtor Dana Bull, Goldwert writes that “‘the number one mistake that people make when they want to buy a house is…starting their own company in the same year.’” Without a W2 or evidence of a stable income stream, a self-employed applicant who recently started their own business cannot “‘offer [the mortgage lender the] historical source of income’” they need to approve a home loan.
What Do Lending Services Look for When Considering a Self-Employed Applicant?
Lending services delve deep into each applicant’s business and personal finance history before issuing a home loan — which can seem fairly invasive to a first-time buyer. To do this, lenders require self-employed applicants to submit personal and business tax returns for at least the last two years, bank account information, earnings statements, their business license and a complete list of all debts – both personal and business. Sometimes, lenders will even ask for testimonials from current clients or contact information for your accountant or financial planner. They examine your cash flow, read through personal and business bank account statements, order your credit report and consider the net income recorded on your tax returns. When single-income applicants who work for a company apply for a loan, the mortgage lender considers their gross income.
In his article “Self-Employed? 8 Keys to Getting Approved for a Mortgage and Buying a Home” for NerdWallet, Hal M. Bundrick, CFP® explains why this matters. Quoting Lenda co-founder and CEO Jason van den Brand, Bundrick writes that “self-employed tax filers write off a bunch of expenses that W-2 employees can’t.” Because of this, a self-employed applicant’s “‘actual net income after all the write-offs is actually a lot lower than it would be otherwise.’” While it certainly lessens your tax burden, lowering your taxable income “hurts your debt-to-income ratio.” Your debts remain the same while your net income falls. This could push you over the maximum DTI ratio of 45% allowed by conventional loan providers and 31% by government-backed lenders. We explain how self-employed single income applicants can avoid this pitfall and otherwise improve their odds of approval below.
How to Make Buying a Home On a Single Income Easier
#1 Consider a Co-Signer
Single income home buyers with less than stellar credit, a high DTI ratio or short self-employment history might consider a co-signer when applying for a home loan. Those who are recently divorced might also benefit from adding a co-signer to their mortgage application. Unlike a co-borrower, cosigners are legally responsible for mortgage payments if the borrower fails to pay, but they are not listed on the title. This means that the primary borrower retains sole ownership while benefiting from the lower DTI ratio or higher credit score of their co-signer.
In his article “What to Know Before Cosigning a Mortgage” for Experian, Louis DeNicola explains that adding a cosigner “may give the lender assurance that [the primary borrower] will be able to make mortgage payments.” In some cases, cosigners can also add more money to the primary borrower’s down payment. Single income applicants should keep in mind that their co-signer’s credit score might not help as much as their DTI ratio. According to DeNicola, “mortgage lenders generally look at both applicants’ credit scores from all three credit bureaus…and use the lower middle score of the two.” As such, if the primary applicant’s credit score is below the minimum requirement, a cosigner’s high credit score will not help much. Applicants should also keep in mind that many lenders only allow “a close friend or relative” to sign onto a primary borrower’s home loan. Never involve a cosigner if your financial situation is so poor that you already worry about defaulting on your loan.
#2 Research Government-Backed Loans With Lower Down Payment Requirements
In general, a few mortgage products are better suited to single income borrowers – especially if they are struggling to meet down payment requirements. Writing for Investopedia in his article “Buying a House on a Single Income,” Daniel Kurt recommends government-backed loans like USDA, FHA and VA loans. Kurt notes that “a conventional mortgage typically requires a 20% down payment.” On the other hand, government-insured loans usually require a much lower down payment.
Some government-insured home loans have no minimum down payment requirements. For example, FHA loans – even FHA 203(k) rehab loans – allow borrowers to put only 3.5% of the home’s purchase price down. Military vets and active duty service members who qualify for VA loans can “finance the entire amount of their purchase” up to the home’s appraisal value.
#3 Check State and Local Programs for Down Payment and Closing Cost Assistance
Some state and local governments offer down payment and closing cost assistance to first-time and low-income home buyers. Those who seek down payment assistance might encounter grants, forgivable loans, deferred-payment loans or low-interest loans. In her article “Down Payment Assistance: How to Get Help Buying a House” for NerdWallet, Barbara Marquand defines each category of DPA and explains which buyers qualify. First, Marquand writes that a grant is “an outright gift of money” that one needn’t pay back. Borrowers needn’t repay a forgivable loan as long as they “own and live in the home after the period [defined in the loan terms] is over.”
Deferred payment loans allow buyers to avoid paying their down payment and closing costs without penalty “until the home is sold, the mortgage is refinanced or the mortgage reaches the end of the term.” Low interest loans are fairly self-explanatory. These loans allow buyers to pay back their down payment and/or closing costs at a low interest rate over a certain period of time – sometimes the length of their mortgage. In order to qualify for down payment assistance in most states, you will probably need to “take a home-buyer education course,” “meet income limits” and “stay below the maximum home purchase price.” Most DPA programs will also require the buyer/borrower to contribute some money towards their closing costs and down payment.
#4 Save Up Six Months of Mortgage Payments if Self-Employed
As mentioned above, lenders often require self-employed applicants to adhere to stricter standards before approving their loan. Given this, self-employed borrowers should try to save at least six months of mortgage payments in order to make themselves more attractive to lenders. In her article “How To Qualify For A Mortgage When You’re Self-Employed” for Rocket Homes, Molly Grace explains.
Grace writes that “lenders may have larger-than-usual reserve requirements” for self-employed applicants. This means that “you’ll have to have a certain number of months’ worth of mortgage payments tucked away in the bank.” While lenders typically require employed applicants to have two months of payments saved, they often ask self-employed applicants for at least six months.
#5 Get a Mortgage Preapproval
Before you make an offer on a house, be sure to get a mortgage preapproval. In her article “How Much Income Do I Need To Buy A House?” for Rocket Mortgage, Victoria Araj explains why a preapproval is important. For those unfamiliar with the term, a “preapproval is a letter from a mortgage lender that tells you how much money you can borrow.” The amount you can borrow is determined by “your income, credit report and assets.” Getting a preapproval letter from your lender not only shows sellers that you can afford to buy their house. It also gives you “a reasonable budget to use when you start shopping for a home” and prevents you from falling in love with a dream home you cannot afford.
#6 Wait Until You’ve Been in Business at Least Two Years if Self-Employed
If you are self-employed, you should wait until you have been in business for at least two years – full-time – until you apply for a mortgage. In his article “How To Get A Mortgage When You’re A Self-Employed Home Buyer” for Rocket Mortgage, Andrew Dehan explains. Dehan writes that to be seriously considered by a lender, “you’ll need a history of uninterrupted self-employment income, usually for at least two years.”
In addition to tax returns and bank statements to prove income stability, your lender will ask for “emails or letters from…current clients, a CPA or a professional organization that can attest to your membership.” In some cases, you might be able to include an old W-2 – even if you just started your business. However, that W-2 must be fairly recent and must be from a job in the same industry as your new business.
#7 Pay Yourself a Monthly Salary if Self-Employed
One of the reasons mortgage lenders consider self-employed borrowers higher risk than borrowers employed by a company is that they do not receive a consistent wage. Without a consistent monthly wage that far exceeds your mortgage payment and other debts, lenders worry you might not be able to pay on time. In his article “Self-Employed? 8 Keys to Getting Approved for a Mortgage and Buying a Home” for NerdWallet, Hal M. Bundrick, CFP® recommends “paying yourself a W-2 wage rather than an owner’s draw.” This shows lenders you have a reliable monthly income stream that can easily cover housing costs.
#8 Keep Business and Personal Expenses Separate if Self-Employed
Bundrick also recommends keeping business and personal expenses separate if you are self-employed. Keeping these accounts separate helps mortgage lenders better interpret the health of your business and security of your income. It also helps borrowers keep track of their expenses and profits.
#9 Make Sure You Have Enough Cash for a Down Payment and Closing Costs
While government-insured loans allow borrowers to put less money down, most require borrowers to pay PMI or “private mortgage insurance.” Based on the value of your loan – usually between half a percent and two percent – PMI could add a hundred dollars or more to your monthly payment. To avoid paying private mortgage insurance, try to put down 20%. Unless you plan to apply for closing cost assistance, make sure you can pay between 3 and 11% of the home’s value upon closing. Use our Closing Cost Calculator to estimate what you might owe.
#10 Avoid Making Any Last-Minute Decisions that Could Affect Your Credit
Lastly, be sure to avoid making any last-minute decision that could affect your credit. In general, underwriters do not smile upon borrowers who make big purchases, apply for other loans or cancel credit cards right before closing on a home. However, paying off debt to raise your credit score and lower your DTI ratio could help you secure better loan terms. Try to pay off debt a few months before you apply. Otherwise, your credit report might not reflect your new DTI.
Ways to Make Owning a Home on a Single Income Easier
Challenges for single income home buyers do not end once they secure a mortgage and close on a home. Homeowners who rely on a single income might take more precautions than couples with a second income source. Below, we offer five tips for new and prospective single income homeowners that could make owning a home a little bit easier and less stressful.
#1 Budget for Maintenance Costs, Property Taxes and Homeowners Insurance
As mentioned above, homeowners incur more costs than that of their monthly mortgage. They must also budget for maintenance and repair costs, property taxes and homeowners insurance premiums. Before buying a house, make sure you consider these costs.
#2 Consider a Home Warranty
Next, consider a home warranty to cover maintenance costs if you lose your job or face an unexpected repair bill. Writing for Investopedia in her article “Do You Need a Home Warranty?,” Amy Fontinelle explains how home warranties can help single income homeowners. First, Fontinelle explains that a “home warranty is not the same thing as homeowners insurance, which covers major perils such as fires, hail, property crimes, and certain types of water damage.” Instead, a home warranty “provides for discounted repair and replacement service on a home’s major components.”
These components include – but are not limited to – a home’s “furnace, HVAC, plumbing, and electrical systems” as well as certain appliances “such as washers and dryers, refrigerators, and swimming pools.” Because home warranty companies usually have relationships with service providers, they can replace or repair your appliances and systems at a lower cost. Keep in mind that warranties do not cover appliances and systems that have been neglected by the homeowner. Most home warranties are a few hundred dollars per year. In some cases, the seller might cover the first year.
#3 Research Insurance Policies
Single income homeowners might also consider taking out a disability or mortgage protection life insurance policy. In our post “Everything You Need to Know About Co-Owning a House,” we recommend co-owners consider buying credit life insurance. Credit life insurance will pay off your mortgage if you die before settling the debt, ensuring this financial responsibility does not pass to your family. If you are a single income homeowner who is solely responsible for your mortgage, you might consider disability insurance instead. Disability insurance protects you from default by helping cover mortgage payments if you fall ill or suffer an injury and are unable to work.
#4 Think About How Long You Plan to Live There
Buying a house might not be right for you if you plan to sell and move away after a few months or a couple of years. In the article “How To Buy a Home on One Income” for The Balance, Casey Bond explains. Quoting real estate analyst Laura Adams, Bond writes that “‘if you’re unsure if you’ll remain in a home for at least three to five years, renting may be a better choice.’” Bond explains that this is “because there are costs associated with buying and selling homes” that you might not recoup if you sell too soon. According to Bond, “if you live in your property for a shorter period, you may not build much equity, or you might lose money on expenses associated with moving.” Paying off your mortgage early could also incur mortgage prepayment penalties. Your mortgage prepayment penalty could be as little as 2% of the remaining balance on your loan, or it could be much more.
This calculator from Zillow helps you determine how long you would need to own a home before hitting the “breakeven horizon.” The breakeven horizon is the point at which the cost of owning a home is equal to that of renting. According to Zillow, you should consider buying if “you’ll stay in your home past the breakeven horizon.” Here’s an example of the breakeven horizon for an LA resident. Redfin recently reported that the median sale price of a single family home in LA County was $915K in January 2022. RentCafe estimates the average rent for an apartment in LA is currently around $2,563. If you – an LA resident who paid $2,500/month in rent – puts 20% down on a $910k home, you would hit the breakeven horizon after six years and nine months of home ownership.
#5 Consider Buying a Duplex Instead of a Single-Family Home
Lastly, consider how your home could function as an investment property. To this end, you might think about buying a duplex instead of a single-family home. This way, you can make passive income to cover your mortgage while you work or in the event you lose your job. To ensure you bring in enough money to cover your mortgage, consider buying a home in an area with a thriving – and growing – rental market. Our rent cruncher calculator can help with this.
When house hunting, look for homes you could easily resell – e.g. homes that appeal to a wide range of prospective buyers. These might be homes with enough bedrooms for a small family, fast and reliable internet access or good schools nearby.