Going it alone as the sole buyer of a real estate property can be stressful and may seem impossible to some. With new mortgage stress tests and a competitive housing market known for bidding wars, it can be challenging to qualify for a mortgage. What's more, these rules aren’t just impacting people who are looking to buy a home, they’re also applicable to people renewing their mortgages. Couples going through a separation or divorce where one party is purchasing the family home from the other could discover they don’t even qualify for a mortgage on the home they currently live in, thanks to these stringent requirements.
Getting approval for a mortgage as a couple can be an arduous task, but when you’re going it alone, particularly as a single parent it can be even more challenging to get the green light on the financing required to purchase a home. When someone is unable to pass the mortgage stress test with a federally regulated lender, they won’t be granted a loan. This means a buyer could be totally out of luck when it comes to making a real estate purchase or forced into a smaller loan than they planned for.
Though single mothers may think that home ownership isn’t in the cards for them, they might be pleasantly surprised. Here are 8 things single mothers should know to improve their chances of qualifying for a mortgage and fulfil their dreams of homeownership.
1. Figure out How Much You’re Putting into Rent
Some people never get off the starting line when it comes to applying for a mortgage, just believing that they won’t qualify, but they may not be any better off renting. The Canadian Rental Housing Index using the 2016 census revealed that renters are experiencing a larger affordability barrier than homeowners with 18 percent, nearly 1 in 5 renters, spending half or more than half of their income on rent and utilities alone. According to the article in The Huffington Post:
The data shows that, nationally, 4 in 10 renters are spending more than 30 per cent of their income on rent and utilities. That's the cutoff level for what Canada Mortgage and Housing Corp. considers affordable.
In fact, The B.C. Non-Profit Association states that this is a crisis level that places many "at risk of homelessness". Big cities like Toronto are particularly pricey, and buying may actually be better for your budget than renting. Look into how much you’re spending on rent and what that would look like in terms of mortgage and property tax payments to see if it’s comparable.
2. Get Expert Advice
If you don’t ask, you’ll never know whether or not you’ll qualify for a home. Toronto based Mortgage Agent Carrie Davidson says:
It's a good idea to speak with a mortgage professional who is licensed and familiar with the mortgage lending criteria. By sharing personal financial goals with your mortgage broker, together we can review finances, budgets, and goals to be certain it's a good time to buy a home or set up a personalized plan to buy a home in the future.
Not only can a mortgage broker help you make an informed decision on a real estate investment, they also have access to multiple rates and lenders, meaning they may be able to secure you a lower mortgage rate than most banks. They also work on a commission basis with the lenders, meaning most of the time there is no cost to you to seek their advice. Davidson encourages people to seek out an experienced mortgage professional who has the client’s goals in mind and values educating the client over the time commitment involved.
3. Understand How Divorce Can Impact Your Finances
Divorced or separated parents will need to provide additional details in order to qualify for their mortgage, that other lenders don’t. Lenders will want to look at the separation agreement, specifically any financial arrangements that have to do with a child or spousal support. It doesn’t matter if you’re the one receiving or making the payments, the bank will still need to see it since these payments or expenses could be a major factor in qualifying for your mortgage. Davidson says:
In my personal experience, the biggest barrier for a single parent qualifying for a mortgage is income. Whether a separation, divorce or even death of a spouse has taken place, the single parent buying a home may not have been employed or earning an income while raising children or being on maternity leave. Banks and lenders are looking for consistency in employment and income to qualify for a mortgage. A single parent should be educated well by their mortgage professional on how important income is when buying a home.
When it comes down to the difference between a single mother and single father applying for a mortgage the biggest barrier for mom is usually income, as it is often the mother who has been staying at home to handle childcare.
4. Avoid Common Pitfalls
First-time buyers can make a number of mistakes that come down to their inexperience alone. This can come as not understanding how much they can really afford and leaving themselves cash poor, not considering additional expenses in their budgeting, or not thinking about their future family needs in a space, or plans for their neighbourhood itself in coming years. Davidson adds:
The most common mistakes made during the home buying process is not being educated about the mortgage financing process. It's crucial to speak with a mortgage professional to understand how one qualifies for a mortgage, the risks, and the additional costs that come with home buying. Knowledge is power!
Another common mistake that Davidson urges clients to consider is other closing costs which often get missed in a first time home buyer’s budgeting process. Make sure to include items like land transfer taxes, legal fees, moving fees, utility set up costs, and possible minor renovation costs in their budget plan - for the estimate of usual costs associated with buying a house check out our list here.
5. Understanding What the Stress Test Really Means
While many people see the mortgage stress test as stopping them from getting what they want in terms of housing, it’s actually designed to protect them and their financial well-being. Carrie Davidson describes the plus two percent qualifying rate as both a restriction and a means of protection for any home buyer. Carrie explains when it comes to single buyers who are qualifying with only one income that existing debt is a large factor in whether or not someone will qualify. She adds:
The new rules, qualifying any client at a higher interest rate is restrictive when only one income is used to qualify for buying a home. The new rules also protect the home buyer should interest rates increase in the future, which ensures qualifying for their home mortgage after their first mortgage term expires. Typically, the mortgage term is 5 years although other options are available for shorter or longer terms.
6. Don’t Forget Your Emergency Fund & Retirement Savings
The old advice is that most people should have around three months’ worth of income socked away for a rainy day or financial emergency. Davidson acknowledges that there is no magic number and these funds will vary based on the age of your child(ren), as well as your financial goals. Davidson reminds clients:
A single home buyer is using one income only. Stability in a job or career is very important so consideration should be given to the client's career goals. If someone is self-employed, where income can fluctuate year to year and income dips below what was used to qualify for the mortgage, it's wise to plan for those times with a separate account for your home expenses.
Simple questions on other financial goals, such as RRSPs or priorities like an annual vacation, saving for your child’s post-secondary education, or even a weekly dinner out should all be considered as a part of the budgeting process.
7. Consider Asking Your Family for Help
It’s not just millennials who are asking their parents for financial help when it comes to purchasing a home. Statistics from Mortgage Professionals Canada reveal down payment gifts from parents have doubled since the year 2000 - around 15 percent of homes purchased between 2014 and 2016. While parents need to consider their own retirement needs before gifting large sums to their children, many are happy to give their children a portion of their inheritance while they can see them, and their grandchildren, enjoy the benefits. Carrie Davidson says:
Sometimes it's a good idea to speak with family/parents when a single home buyer is ready to purchase a home. So often, parents are willing to help a child out with the down payment, closing costs (land transfer taxes, legal fees) or home set-up costs such as renovations, painting, and furniture.
8. Have Hope After a Mortgage Decline
There are many reasons a person could be declined for their mortgage. Sometimes savings decrease during a divorce, or credit gets bruised as additional expenses occur with the break-up. Carrie Davidson says:
I've worked with many different clients having multiple issues around these three important factors that are carefully examined by banks and mortgage lenders. With education and guidance from an experienced mortgage professional, we work together to be sure mortgage financing is obtainable in the future.
Patience is key because people can build their credit scores and savings and reapply in a few months or years. Davidson says that finding the right financial fit is imperative in setting up a client for a healthy and happy home buying experience. She also reminds clients along with the motto of "save, save, save" that:
Purchasing a home is not always a sprint, to prepare for it properly, it's very often a marathon and the commitment of both the client and mortgage professional is very important.
If you're considering buying on your own as a single parent, contact The Julie Kinnear Team for help. We'll happily guide you through the process!