Essential steps for securing home loan on a single income

Securing a home loan with just one source of income may seem daunting at first. However, by gaining a thorough understanding of the complexities associated with the loan process, one can strategically prepare to achieve homeownership. This simply requires additional preparation and meticulous planning of a systematic payment strategy. To improve your chances of getting approved for a loan on a single income, here are some steps you can take:

Improve your credit rating:

When seeking a home loan, it is essential to have a strong credit score. Aim for a minimum score of 740 to secure advantageous interest rates. How to improve your credit score? Ensure timely payment of bills, keep credit card balances low, and avoid taking on more debt.

In fact, the most significant factor influencing your credit score is making timely payments. Late payments can substantially lower your score, so consider setting up autopay or reminders to ensure you pay on time. Additionally, your credit utilization ratio, which compares your credit card balance to your credit limit, is important. Aim to keep it below 30% for a strong score. Paying down balances or increasing your credit limit can be beneficial.

Lastly, be cautious about applying for multiple loans within a short timeframe, as this may be viewed as risky by lenders. Space out loan applications and prioritize managing your current loans effectively.

Focus on saving for a larger down payment:

Increasing the amount you can put towards the purchase price reduces the loan amount you will require. This makes you a more appealing borrower to lenders and may result in you qualifying for a reduced interest rate.

By making a larger down payment, the loan amount is reduced, which in turn lowers your monthly payments and enhancing your debt-to-income ratio (DTI). This makes you a more attractive borrower to the lenders. Additionally, it demonstrates to them that you have a substantial stake in the investment, reducing their risk and greatly improving your chances of loan approval. Moreover, many lenders provide better interest rates to borrowers with larger down payments, potentially saving you a considerable sum over the loan’s duration.

Ensure thorough documentation of your income:

Thoroughly documenting your income is essential, particularly for single-income borrowers, as it provides reassurance to lenders regarding your capacity to repay the loan. These documents offer evidence of your recent income and compensation structure, encompassing base salary, bonuses, and deductions.

For self-employed individuals, this means having consistent income records for the past few years, demonstrated through tax returns and financial statements. Salaried individuals should include pay slips and employment letters. It is recommended to include pay slips from the preceding three to six months. The employer letter confirms your employment status, salary details, and date of hire, bolstering your application by demonstrating job stability.

Lower your Debt-to-Income (DTI) ratio:

Lenders analyse your DTI to evaluate your capacity to handle monthly expenses. This ratio compares the total amount you pay towards debts each month, including housing expenses, to your gross monthly income. It is advisable to aim for a DTI ratio that is 36 percent.

Maintaining a low DTI ratio is crucial for all home loan applicants, particularly single-income borrowers. A reduced DTI suggests that you have more income available after fulfilling your current debt commitments. This demonstrates to lenders that you can effectively handle a loan payment alongside your other financial obligations.

Lenders view a low DTI as a reduced risk of loan delinquency, increasing the likelihood of approval for your application. Borrowers with favourable DTI ratios frequently qualify for reduced interest rates, leading to substantial savings throughout your home loan.

Think about adding a co-borrower:

Having a co-signer with a robust income and credit record on your application can greatly enhance your approval prospects. This individual would bear legal responsibility for the loan in case you are unable to make payments.

Having a co-borrower possessing a robust credit score and income history substantially enhances the overall creditworthiness of your application. This can result in loan approval and potentially improved interest rates. Including the co-borrower’s income can also qualify you for a higher loan amount, offering greater flexibility in your home search. Additionally, the co-borrower shares legal responsibility for the loan, which provides lenders with extra security and reassurance.

Compare lenders:

Explore different lenders as they provide diverse loan options and interest rates. Avoid accepting the initial offer you receive. Each lender has its eligibility criteria and loan offerings. Comparing options empowers you to identify a program that best fits your income, credit history, and property type. Request quotes from multiple lenders to identify the one offering the most competitive terms suited to your circumstances.

Comparing lenders is essential, particularly for single-income borrowers, as it enables you to secure the most advantageous deal. Interest rates and loan terms can differ significantly among lenders. By evaluating quotes, you can pinpoint the lender offering the lowest interest rate, resulting in substantial savings throughout the loan duration.

Be aware of the warning signs:

Despite thorough preparation, several considerations should be taken into account before obtaining a home loan on a single income:

Inability to afford:

While you may qualify for a specific loan amount, it’s crucial to assess if you can comfortably manage the monthly payments, property taxes, homeowners insurance, and potential maintenance expenses for the foreseeable future. Unexpected events like job loss or illness can strain finances, especially on a single income. It’s wise to include a cushion for emergencies in your financial planning.

Reduced borrowing capacity:

Single-income households typically receive pre-approval for smaller loan amounts compared to dual-income households. This limitation may constrain your choices regarding property location or size that you can afford.

High interest rate:

Single borrowers frequently face slightly higher interest rates because lenders perceive them as higher risk. This results in a higher total loan cost over the loan’s duration.

Long-term property commitment:

A home loan represents a significant, long-lasting commitment. Should your situation change, such as a job transfer, selling the house promptly might not be viable, especially in a sluggish market. Moreover, there could be financial consequences for early loan termination.

Reduced financial flexibility:

Opting for a loan payment reduces the freedom in your budget to cover other expenses. It may become more challenging to save for other goals or take on additional debt.

It is crucial to take into account these limitations with the benefits of owning a home. Prior to committing to a loan on a single income, make sure you are financially ready for the future.

The author is CEO & Co-founder, BASIC Home Loan. Views are personal.