Low income shouldn’t keep you from getting a mortgage

Many renters who don’t make a lot of money assume they could never own a home.

That’s simply not true.

Mortgage lenders aren’t so concerned with your income level. Income is just one piece of the mortgage approval, and not even the most important one.

Don’t have a sky-high income? It could be worth checking your home-buying eligibility anyway. Here’s what you should know.

Verify your mortgage eligibility. Start here (Nov 5th, 2021)

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Income is not the most important piece of your mortgage application

Many would-be home buyers assume a lender would take one look at their paycheck and send them away.

But a lender would be foolish to do so.

That’s because income alone doesn’t determine whether you are qualified.

Rather, it’s your proposed, future mortgage payments — compared to your income — that matter most. This will determine whether you can afford the home, which is much more important than considering income in a vacuum.

To determine affordability, lenders look at your debt-to-income ratio (DTI).

DTI compares your current debt payments to your income.

This ratio is vastly more important than raw income data. In fact, a lender would much rather approve a borrower who earns $30,000 per year with a 28% DTI than one who makes $200,000 per year with a 50% DTI.

Let’s break things down with a closer look at how DTI is calculated and why it matters.

A closer look at DTI and why it matters

Lenders love applicants with low debt-to-income ratios.

Low debt payments mean applicants can manage their finances well despite a low income level. This kind of applicant is a ‘good’ credit risk.

Let’s look at two applicants and how lenders evaluate them.

Low Income High Income
Monthly Income $2,500 $10,000
Future House Payment $650 $2,500
Taxes, Insurance, HOA $200 $450
Car Payment $100 $700
Credit Card Payment $25 $350
Boat Payment $0 $800
Total Debt Payments $975 $4,800
DTI 39% 48%

The lender will have a much easier time approving the low-income applicant in this example. Typically, the DTI limit is 43% for conventional loans. As it stands, only the low-income applicant makes the cut.

Verify your mortgage eligibility. Start here (Nov 5th, 2021)

Low-income mortgage programs

Applicants without a high income can be approved for any loan type. There is no “minimum” income for any mortgage, period.

If the borrower’s mortgage payment and other debts were low enough, a lender could approve someone with an income of $10,000 per year or even less!

But this assumes the borrower can meet down payment requirements and pay closing costs — a tough hurdle, especially for many first-time homebuyers.

Here’s the good news: There are many loan options available today that cater to lower-income families. In fact, many agencies set upper income limits on their programs.

The following are a few such examples.

1. USDA loan

The USDA loan is a great option for lower-income borrowers because it requires no down payment and comes with lower mortgage insurance than FHA loans.

One part of the eligibility check is the property’s location. The United States Department of Agriculture (USDA) sets boundaries for these zero-down home loans.

But rural as well as suburban neighborhoods around the country are eligible. Many cities and towns just outside of major metropolitan areas fall within the USDA’s ‘rural area’ boundaries.

These loans are so attractive, in fact, that USDA has set maximum income limits on these loans to make sure they are being used by those who most need them. Current limits are set at 115% of the area’s median income.

For example, the following are annual household income limits for popular areas around the country.

  • Portland, Oregon: $111,200
  • Dallas, Texas: $102,350
  • Gainesville, Florida: $91,900
  • Flagstaff, Arizona: $91,900

These moderate income limits are not restrictive by any means. (They’re even higher for households with more than four members.)

Still, they demonstrate the USDA’s focus on the lower income applicant. That shows up in this program’s DTI requirements.

While “by the book” DTI limits are set at 41% on USDA-backed mortgage loans, many borrowers can be approved at higher DTIs with decent credit scores or other compensating factors.

As a home shopper with a lower income, check your USDA eligibility when you apply for your home loan.

2. FHA loans

The U.S. Department of Housing and Urban Development operates the FHA loan program, which exists to lower barriers to homeownership. 

It’s no surprise that lower income borrowers flock to FHA.

Because the Federal Housing Administration insures these loans, lenders can approve applicants with very high DTIs. Plus, the program requires just 3.5% down for borrowers with credit scores of at least 580.

When you don’t make a high income, saving for a large down payment is next to impossible.

FHA loans were created in 1934 to give low-income renters a shot at owning a home with a long-term, steady loan product. Almost 90 years later, this loan program is still serving that purpose.

Credit leniency is another area where FHA shines.

It’s possible to get approved with a credit score as low as 500 if you can make a 10% down payment.  According to software company ICE Mortgage Technology, about 25% of FHA loans are issued to applicants with credit scores between 600 and 649.

Lenders aren’t shying away from approving low-income or low-credit home buyers. And because federal mortgage insurance protects lenders, they can offer competitive interest rates to FHA-approved borrowers.

3. VA mortgages

Most active-duty military service members and veterans can use a VA loan.

With backing from the U.S. Department of Veterans Affairs, these loans require zero down payment. The barrier to entry is almost non-existent.

Plus, they require no annual mortgage insurance — just an upfront funding fee. So home buyers can qualify for more home than they would with standard programs.

Let’s take a look at a total monthly mortgage payment on a $300,000 home:

VA Loan 0% Down Conventional 5% Down
Mortgage Rate* 3.0% 3.25%
Principal & Interest $1,294 $1,240
Mortgage Insurance $0 $200
Taxes, Insurance, HOA $250 $250
Total $1,544 $1,690

*Mortgage rates are for example purposes only. Your own interest rate will be different.

In this example, using a VA loan means saving $146 per month and skipping the 5% down payment. Anyone with current or former military experience should check their VA eligibility first, whether they have a low income or not.

4. HomeReady and Home Possible

Lower income borrowers can also find conventional mortgages with low down payment and high DTI limits.

Conventional loans are not insured by government agencies like the FHA, USDA, or VA. Instead, they are regulated by Fannie Mae and Freddie Mac, which are sponsored by the federal government.

Fannie Mae’s HomeReady loan requires only 3% down, and you could count income from a boarder or roommate which could lower your DTI and help you qualify for a larger mortgage loan.

Freddie Mac has a similar program called Home Possible. With Home Possible, you could use income from a co-borrower who doesn’t live with you to boost your application.

Conventional loans require private mortgage insurance (PMI). But unlike FHA and USDA mortgage insurance, you can cancel PMI once you’ve paid down the loan amount by 20 percent.

5. Good Neighbor Next Door

The Good Neighbor Next Door program is available to certain public-sector employees including law enforcement officers, teachers, firefighters, and emergency medical technicians.

In other words, professions known for being paid a lot less than the job is truly worth to society.

As a “thank you,” HUD, the overseer of FHA, offers some of its owned real estate at a 50% discount. You can choose only from HUD-owned single-family homes; you couldn’t shop on the open housing market.

Still, at fifty cents on the dollar, even very-low-income home buyers could afford to buy a house via the GNND program.

6. Down payment assistance programs

Many renters assume they could never save up enough money for a down payment. Well, they may not have to.

The Urban Institute reports that 82% of renters in the U.S. earn less than 120% of their area’s median income — which means these renters could probably qualify for a down payment assistance program.

Public housing authorities, city and county governments, and nonprofit organizations are all sources of down payment assistance loans and grants that could help you become a homeowner sooner.

These programs often require homeowner education courses, and some require higher credit scores than mortgages without down payment assistance.

Most programs welcome only first-time buyers, but this definition includes families who haven’t owned a home in at least three years.

To find home buyer programs near you, ask your real estate agent or just Google “down payment assistance programs [your area].”

You might be surprised to find thousands of dollars sitting there waiting to be used. In some cases, local governments can offer tax credits, too.

Verify your mortgage eligibility. Start here (Nov 5th, 2021)

How to buy more home on a low income

Income matters to mortgage lenders, but not because of strict income requirements. Income matters within the context of your existing debt load and your credit profile.

Even if you can’t increase your income, you can increase your home buying budget by improving your financial life before applying for a mortgage.

Start by:

  • Paying off some debts first. If you have a car loan or a personal loan that’s almost paid off, try to pay it off before applying for your home purchase loan. This could lower your DTI and boost your home buying budget
  • Improving your credit history. Errors on your credit report could be pulling down your credit score. Disputing these could help you qualify for a bigger home loan. And making a habit of paying your bills on time should improve your credit history over time
  • Saving up some money. Bringing your own down payment and closing cost money to the table simplifies mortgage qualifying. If you can’t save, look for down payment assistance programs that help low-income families in your area
  • Applying with a co-borrower. Income from a co-borrower could strengthen your loan application as long as your co-borrower has solid credit and isn’t saddled with heavy debt
  • Using the right loan program. The right loan program should line up with your specific needs. For example, FHA loans work well for borrowers with lower credit scores and USDA loans excel for applicants with no down payment. If you don’t need this kind of help, you might save money with a conventional loan
  • Using location to your advantage. Sometimes you can find nicer homes for less money when you’re willing to shop outside your region’s most popular neighborhoods

By strengthening your status as an applicant, you can score lower monthly payments for the same home — all without increasing your income.

Will I have to pay private mortgage insurance?

For many borrowers, mortgage insurance seems like an annoying extra fee added to their monthly payments. After all, this coverage protects the lender in case of foreclosure, even though the borrower has to pay for it.

But this coverage has a purpose for the borrower, too: It lowers the risk for lenders, which allows lower mortgage rates.

A conventional loan with 20% or more down won’t require mortgage insurance. VA loans don’t require annual mortgage premiums even if you don’t make a down payment.

But FHA- and USDA-backed loans — along with conventional loans with less than 20% down — will need this extra coverage.

USDA and FHA loans require an upfront mortgage insurance fee along with ongoing annual premiums for the life of the loan in most cases. Conventional mortgages won’t require the upfront fee, and you’d be able to cancel annual payments once you’ve paid off 20% of the loan.

Getting pre-approved can remove the mystery

Not sure where you stand as a home buyer? Getting pre-approved by a mortgage lender can show your price range.

A pre-approval mimics the mortgage application process but without the hard credit check. It’ll show what size loan you could get based on your personal finances.

Along with showing your price range, a pre-approval can show home sellers you’re a serious buyer. This is especially important when you’re buying your first home.

How do I apply for a low-income home loan?

Your income is only a secondary factor when it comes to loan approval. The lender will put much more weight on your monthly debts, your credit score, and other factors.

That means you don’t need a sky-high income to buy a home. You just need to be a responsible money manager.

Get a personalized home buying eligibility analysis now. There’s no obligation to proceed, and you might be surprised at what you can qualify for.

Verify your new rate (Nov 5th, 2021)

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