Did you know that you don’t have to be a millionaire to buy a home? You may not even need ‘average income’ to get qualified. There are loan programs that can help you get a home despite your low income. Before you think you are set to go, make sure the rest of your qualifying factors meet the requirements, though.
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There are four main loan programs that help borrowers with low-income:
- USDA loans
- FHA loans
- VA loans
- Fannie Mae HomeReady loans
Focus on Your Credit First
One of the first things lenders look at when qualifying you for a mortgage is your credit score. Think of it like the lender’s first impression of you. What do you want them to think of you? If you have a low credit score, they may think that you are financially irresponsible. Couple that with your low income and you are well on your way to a loan denial.
If your credit score is average or above average, you let the lender know that you make smart financial decisions. While it takes more than the actual score for a lender to give you a loan, having that high score is certainly a good first step to get yourself in the door for a low-income loan.
Keep in mind that in addition to your credit score, lenders look at your credit history. They want to know how many accounts you have as well as how much debt you have outstanding. They compare your outstanding balances to your total credit limits on your revolving debt. They also look at your payment history. Have you paid any of your bills more than 30-days late? This will weigh in on their decision as well.
Save Money for a Down Payment
If you don’t qualify for a USDA or VA loan, you’ll need some type of down payment. The USDA loan and the VA loan are the only two programs that provide 100% financing. The USDA loan is for borrowers with a total household income that is less than 115% of the average income for the area. The VA loan is for veterans that served at least 181 days during peacetime or 90 days during wartime. If you don’t qualify for either of those, you’ll need a down payment.
The other loan programs available to low-income borrowers are the FHA loan and the conventional HomeReady loan. You’ll need 3.5% or 3.0% respectively for these loan programs. Luckily, both programs do allow you to accept gift funds for the down payment up to 100% of the amount that you need.
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If you don’t have access to gift funds, though, you’ll need to come up with the respective down payment on your own. Start saving early so that you can have the amount you need when you apply for a mortgage. For example, if you buy a $100,000 home, you would need $3,500 for an FHA loan or $3,000 for the HomeReady loan.
Figure Out Your Budget
Your final step is to figure out what you can afford. Each loan program has their own debt ratio requirements, which can help guide you:
- FHA loans – Your housing payment can be as much as 31% of your gross monthly income
- USDA loans – Your housing payment can be as much as 29% of your gross monthly income
- VA loans – Your total debt ratio can be as much as 41% of your gross monthly income
- HomeReady Loans –Your total debt ratio can be as much as 45% of your gross monthly income
Using these numbers, you can see what size mortgage you might qualify for, assuming you have the income to support it. Of course, you should only take a mortgage payment that you can comfortably afford, no matter what it says ‘on paper.’ You are the one that has to make the payments, so make sure that you are capable of affording the loan that you take.
Don’t Forget Mortgage Insurance
The VA loan is the only loan program that doesn’t charge mortgage insurance despite the fact that you can borrow up to 100% of the home’s value. The other three loan programs require mortgage insurance:
- FHA loans – You’ll pay 1.75% of the loan amount upfront and 0.85% of the outstanding loan amount each year (divided amongst your 12 monthly payments.) This insurance lasts for the life of the loan.
- USDA loans – You’ll pay 1.0% of the loan amount upfront and 0.35% of the outstanding loan amount each year (divided amongst your 12 monthly payments.) This insurance lasts for the life of the loan.
- HomeReady Loans – You’ll pay mortgage insurance for as long as you owe more than 80% of the home’s value. The exact amount that you pay depends on your credit score and final LTV.
As you can see, you can buy a home with low income; you just have to think outside of the box. A conforming loan probably won’t be your first option since you have low income. The other government-backed and even one Fannie Mae backed program, though, gives you options to help you become a homeowner.