Many renters may think they don’t have enough income to qualify for a home loan. That isn’t usually true. Most mortgage lenders aren’t concerned with only your income. Income is just one part of the mortgage qualification puzzle.
Even if you don’t have a high income, you still should investigate home ownership. Qualifying for a home loan with low income isn’t as difficult as you may think. Most loan officers are not even aware that low income home loan programs are available.
Income Isn’t Everything
Many renters who think about buying a home think mortgage companies would just look at their paystub and turn them down. But this isn’t usually true. After all, income by itself doesn’t ensure you will qualify for a home loan.
What’s more important is what your future mortgage payment will be compared to your income that is the most critical. This is what decides if you can afford the home, which is a lot more important than what your income level is by itself.
When a mortgage company wants to know if you can afford the mortgage, it will look at your debt-to-income or DTI ratio. This ratio means a lot more than what your raw yearly income is. In fact, the mortgage company will approve someone with a $35,000 income with a 28% DTI over someone with a $250,000 income and a 50% DTI.
Let’s examine how DTI is calculated so you understand why it’s so important for getting a home loan.
What it comes down to is lenders like people who have a low DTI, regardless of their gross monthly income. For example, someone who makes $3000 gross per month might not sound like they have a lot of money.
However, their proposed mortgage payment is only $600 per month and they have credit card payments of $50 and a car payment of $100.
But the person with a $20,000 monthly income will have a $3000 mortgage payment, an $800 car payment and $500 in credit card payments. Even though the second person has a higher income, they are more strapped financially.
Most lenders will have an easier time approving someone with low income and a low DTI. Most conventional lenders want to see a DTI of no more than 43%.
Plenty Of Low-Income Mortgage Programs
If you have a low income and want a home loan, there are many programs available. If you have a low DTI and decent credit score with a low income, you can likely qualify for many conventional or government-backed home loan programs.
The fact is, if your mortgage payment and debt payments are low enough, some lenders could approve you for a home loan on a $1000 monthly income. But that is assuming you can make a down payment and pay for closing costs. Those hurdles can be challenging for first-time home buyers.
Fortunately, there are several low income home loan programs available that can help lower-income folks.
The FHA program was created in the 1930s to help people with lower incomes get into their own homes. According to HUD, this is the big reason that so many low-income borrowers use FHA loans.
The Federal Housing Administration backs these loans, so lenders can green light applicants even if they have a high DTI. Also, the program only requires 3.5% down as long as your credit score is above 580.
This program is popular because the down payment is reasonable, which is often challenging for those with lower incomes and who never owned a home.
FHA also has reasonable credit requirements. If you can put down 10%, it’s possible to be approved with a 500-credit score. And about 25% of FHA loans are given to people with a credit score between 600 and 650.
Lenders are not overly concerned about approving people with low income. The federal program protects lenders if the borrower defaults on the mortgage. That’s why the lender can offer low interest rates to the homeowner.
The USDA home loan is an attractive option for a borrower with lower income because there is usually 100% financing and the cost of mortgage insurance is lower than FHA.
However, the home needs to be located in a rural area, according to USDA. That is a sticking point for many people to qualify for this 100% financing low-income home program.
But there are some suburban neighborhoods that also qualify for USDA loans. These loans are attractive enough that USDA has established maximum income levels, which are 115% of the region’s median income.
For example, if you want to buy a home around Dallas, you cannot earn more than $102,300 per year to qualify for a USDA. Loan. Near Gainesville, Florida, the maximum is $91,900.
These are moderate incomes that many people can qualify with. But they show that the focus of the USDA program is for people with lower incomes. And you can see this in the debt-to-income requirements, too.
The DTI limit in the manual for USDA loans is 41%, but some borrowers can get an approval with a higher DTI if they have a good credit score.
The USDA program is an outstanding choice for the lower income borrower because of low loan costs and no down payment.
HomeReady And Home Possible
People with low income also can find conventional home loans with a low down payment. While conventional home loans are not backed by USDA or FHA, they are regulated by Fannie Mae and Freddie Mac.
The HomeReady program only requires a 3% down payment. And you can count income from someone who rents a room in the home to reduce your DTI.
Freddie Mac has the Home Possible program that also lets you use the income from a co-borrower who doesn’t live in the home to get the application approved.
This loan requires private mortgage insurance, but you can cancel the insurance once you have 20% equity.
The programs mentioned here show that lenders and the US government stand by low-income borrowers to help them buy a home. So, talk to your mortgage lender today for more information.