Dubai: Buying a house with a partner, family member or friend evidently lessens the financial burden of homeownership. Co-owning a house usually means lower monthly mortgage payments and maintenance costs for each person involved. But would it be feasible if you were to go at it solo?
“Not every prospective home buyer is interested in co-owning a house. Unfortunately, single-income home buyers often encounter more obstacles than home buying partners,” said Prakash Bhat, a real estate and mortgage consultant currently working out of Abu Dhabi.
“The primary obstacle a homebuyer with a single income may feel is that often times homes cost so much that he or she cannot single handedly finance the purchase. If you are hoping to buy a home on a single income, you should know that it can be hard, but it isn't impossible.”
What are the downsides to single handedly buying a home?
There are two significant challenges when buying a home on a single income, according to Bhat. The first is saving enough for a down payment, and the second is qualifying for a sufficient mortgage or a home loan.
So while potential homebuyers are widely advised to factor in ownership expenses like insurance and maintenance costs, if you are homeowner with only one income, experts advise how you can plan with less available cash flow compared to home buying households with multiple incomes.
“The required down payment for a home loan varies based on the property you buy and your lender, but it is typically at 20 per cent of the purchase price, if not more, as for a purchaser to obtain a home loan, the UAE central bank requires a 20 per cent down payment,” Bhat added.
Does your single income affect your home buying chances?
Homebuyers can also expect to pay up to 3 per cent of the total home price in closing costs. However, aside from the initial costs of a home loan, are there any risks affecting a single-income home buyer’s prospects of qualifying for a loan?
“When it comes to the actual loan, having only one income may affect your ability to get approved at the lowest possible interest rate and monthly payment,” said Stephanie Myrtle, vice president of a Dubai-based real estate research firm. Here’s why.
When two people apply for a mortgage, the lender considers both their incomes and financial profiles when determining how much they can afford to borrow. Myrtle further noted that lenders universally view an application with more than one income as less risky than a single borrower.
“You may also be stuck with less than ideal mortgage terms if you don't have strong credit – or even if your investment partner doesn't. Lenders typically use an average of your combined scores to evaluate your application, and some lenders even use the lower of the two scores,” he added.
How much can you single-handedly save for a down payment?
If you can save at least 20 per cent for a down payment, your chances of approval will be significantly increased, explained Myrtle, while adding that to demonstrate to the lender that you can make payments, you must have a low debt-to-income (DTI) ratio.
“Many lenders follow the 28/36 rule, meaning your maximum housing expenses (including mortgage payments and insurance) should not exceed 28 per cent of your income. Likewise, your total existing debts should not exceed 36 per cent of your income,” added Myrtle.
“Some lenders might accept a higher DTI. However, you'll improve your chances of getting approved with one income if your debt levels are low. Consider paying down any outstanding credit card balances or loans before applying for a mortgage on a single income.”
The costs of homeownership are often easier to handle on two incomes. However, it's still possible to buy a home on one income. So bear in mind that you might have to set your sights on a less expensive home.
“You can get a mortgage if there is only one income in your household. If a lender believes that you'll be able to make payments for the life of the loan, the number of incomes doesn't matter,” added Bhat. “But how do you decide how much cash you need to single-handedly buy a house?
“While the amount of cash you need to buy a house will depend on the home and loan you choose, to borrow money at the lowest rates you’ll need a 20 per cent down payment and a salary of at least 25 per cent of the total purchasing price.”
So it really depends on what you’re looking to buy and how much you want to spend to do it. Let’s say you are looking to buy a Dh200,000 house. You will typically need a Dh40,000 down payment and at least Dh50,000 in annual salary with a good credit score to go forward with your purchase.
How much you can afford depends on several other factors, such as how much income you earn and home prices where you live. It also depends on how much debt you have taken on compared to your income, which is the ‘debt-to-income’ ratio (explained above).