How to Buy a House With Low Income: Tips To Help You Become a Homeowner
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Summary:
Usually, there isn’t a hard minimum income requirement to qualify for a mortgage. However, the debt-to-income requirement makes it difficult for low-income buyers to obtain a mortgage. That said, several specialized loan programs, including FHA and USDA loans, can help low-income earners. And there are many home-buying programs specially designed for people with low incomes. Here’s how to buy a house with low income.
Gone are the days when all you needed was a pulse to qualify for a mortgage. These days, it’s much more difficult to get a loan as a low-income earner, but far from impossible. However, as the government is motivated to get everyone on the housing ladder, it offers a few different loan programs to serve the needs of low-income earners in need of a mortgage. Learn more about them below.
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Can low-income earners get a mortgage?
The short answer is yes, they can. Buying a house with a low income does not mean you are locked out of the lending market. Mortgage lenders typically don’t have fixed income requirements but will consider affordability as well as debt-to-income (DTI) parameters.
Due to the DTI requirements, it’s usually more difficult for low-income earners to get a loan. Fortunately, there are both loans that are suitable for low-income earners as well as government programs that enable low-income earners to get on the housing ladder and afford their monthly payments. Here are some options.
FHA loans
Loans given by the Federal Housing Administration (FHA) are government-backed loans that are more flexible for low-income earners. An FHA loan will offer these terms:
- DTI of up to 45%
- Credit score as low as 580
- 3.5% down
USDA loans
A USDA loan, also called the Single Family Housing Guarantee Program, is a loan geared towards middle-income to low-income families that reside outside of large metropolitan areas. With a USDA loan, you must buy in a USDA-eligible rural area. USDA loans offer the following terms:
- DTI of up to 41%
- Credit score minimum of 640
- Median income cannot exceed 115% of the annual median income in the area
- No money down, 100% financing
VA mortgages
VA loans are backed by the Department of Veterans Affairs. They are no-money-down loans given to men and women who have served in the armed forces, as well as the surviving spouses in some cases. They offer:
- No DTI requirements
- No minimum credit scores
- No money down, 100% financing
Pro Tip
VA loans cannot be transferred to children. This goes for preexisting VA loans as well. If you are the child of a service member who has passed away with a VA loan on their home, you cannot transfer the mortgage to yourself. You will need to do a cash-out refinance with a new mortgage somewhere down the line.
HomeReady and Home Possible loans
HomeReady and Home Possible loans are conventional loans backed by Fannie Mae and Freddie Mac and geared toward low-income borrowers. As these are conventional loans, borrowers will be required to take out private mortgage insurance (PMI). However, the PMI rate is lower than it would be with any other normal, conventional loan.
HomeReady loan terms
- DTI up to 50%
- Credit score 620 minimum (680 for “standard pricing”)
- Reduced mortgage insurance requirements
- Allows for non-occupant borrowers (parents)
- 3-5% money down, 95-97% financing
- Required homeownership counseling
- Annual income must be less than 80% of the annual median income (AMI)
Home Possible loan terms
- DTI up to 50%
- Credit score 660 minimum, although there are options for “no credit history”
- Reduced mortgage insurance requirements
- Allows for non-occupant borrowers (parents)
- 3-5% money down, 95-97% financing, no credit triggers 5% down
- Annual income must be less than 80% of the annual median income (AMI)
Home-buying programs for low-income earners
These programs are specifically designed to help home buyers with low incomes.
Good Neighbor Next Door
Good Neighbor Next Door is similar to the key worker program in the U.K. that makes developers build portions of new developments in places like London with discounted properties for key workers. Key workers, or “good neighbors next door,” are low-income earners that work for the government in jobs such as teaching or firefighting.
The program allows for a 50% discount off the list price in a HUD revitalization area. These are areas that HUD has a hand in developing and are, in most cases, not “established.” You also need to live on the property for at least three years.
HUD homes
HUD homes are distressed assets that previously had FHA mortgages behind them. When the initial borrower defaults, HUD forecloses on these homes. HUD homes are not “discounted”; they are just sold at a very low price and come as-is.
This means that you could theoretically end up putting more money into the property to make it viable than you actually paid for it. As with any distressed asset, HUD homes need to be purchased with due diligence and an “eyes wide open” approach to the condition of the asset.
Section 8
Section 8 is also referred to as the Housing Choice Voucher Program. The Section 8 program was embraced after the general acceptance that public housing programs, or “projects,” had some serious problems. Some Section 8 programs in the United States will offer a homeownership path via the Housing Choice Voucher Program. However, as Section 8 is administered locally, it’s best to speak to your local government office to determine if it offers this program.
Down payment assistance programs
Even if you get a salary every month, you might not have enough money for a down payment for various reasons. Down payment assistance programs (DPS) can help people secure the down payment needed to buy a home. They are typically only available for first-time home buyers. They consist primarily of grants and loans.
Make sure you can afford a home regardless
Regardless of whether or not you qualify for a low-income home-buying program or home loan, you need to make sure you can afford the monthly payments. For low-income earners, credit is extremely important as it allows them to make purchases via credit that they otherwise couldn’t. Timothy Ford, a seasoned certified financial planner, always makes sure that his clients are able to afford the payments, not matter what, on their home loans.
“One of the trickiest things to look at with clients on a fixed salary is if they have a bit of a buffer if something changes,” Ford says. “I always tell them to have cash available for 4-6 months of mortgage payments should something happen like they lose their job or something along those lines. A credit hit to a person on a lower fixed salary can be very difficult to overcome, and could create a cycle of worse and worse credit.”
A credit hit to a person on a lower fixed salary can be very difficult to overcome, and could create a cycle of worse and worse credit. - CFP Timothy FordClick to Tweet
FAQ About How to Buy a House with Low Income
What are the income requirements or guidelines for purchasing a house with a low income?
Different programs will have different metrics and requirements. For example, the Home Possible program requires that the borrower not make more than 80% of the AMI or annual median income. For the Good Neighbor Next Door program, borrowers must be working at low-paying government-sponsored jobs such as a teacher, police officer, or fireman.
How can one improve their chances of getting approved for a mortgage with a low income?
The first order of business should be to improve your credit score. After that, manage your debt so that your debt-to-income ratio is respectable.
If you would like to improve your credit score before trying to obtain a mortgage, these credit repair companies can help.
If you would like to improve your credit score before trying to obtain a mortgage, these credit repair companies can help.
What are the potential challenges or obstacles to be aware of when buying a house with low income, and how can they be overcome?
Some of the challenges are not being able to afford the monthly mortgage payments/mortgage interest, living in a HUD revitalization area that is currently dangerous, and buying a property that needs fixing up and not being able to afford the repairs.
To overcome these obstacles, make sure you do an incredible amount of due diligence before you jump into the housing market as a low-income earner.
Key takeaways
- Although there is no income requirement to qualify for a mortgage, affordability and debt-to-income ratio requirements make it more difficult for low-income buyers to obtain a mortgage.
- The primary option for low-income buyers to own a home is to obtain a home loan geared toward low-income buyers from a mortgage lender or utilize one of multiple government programs.
- Each option for buying a loan with a low income will be different in terms of income requirements, down payment requirements, interest rates, and closing costs.
- It’s important to do due diligence on the home, as well as the loan or program, before jumping into the housing market with a low income.
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