Your income is one of the primary factors mortgage companies to determine if you qualify for a loan. For every mortgage loan, there are minimum income requirements and maximum debt limits that must be met in order to qualify. No question about it, for people with low income, this presents a difficult barrier to homeownership.
But it can be done. In fact, there are some mortgages designed to work for you.
Low income qualification varies by location, so there is no hard and fast income amount that determines eligibility. Typically, the minimum requirement is based on your income in relation to your other financial obligations. Most lending companies require your housing costs take up less than 28% of your pretax income and your debt payments take up less than 36%. They have limits on how much of your monthly income goes toward debt (this is called your debt-to-income ratio, or, DTI). A DTI of 45% or less is a pretty standard threshold. Higher ratios may be allowed for people with higher credit scores and for loans carrying private mortgage insurance (PMI).
Low income status does not have to exclude you from owning your home, and it shouldn’t force you into a less than ideal mortgage.
Before you search for a home, do research on your loan.
- Get an idea of what money you’ll need. Make this your first step. Look online to find out what an average home in your area costs. Taking that as baseline, use the online mortgage calculator to see what a mortgage might look like for you. Remember this is an estimate and mortgage rates can change at any time.
- Figure out where you stand. Gather all of your financial information, including your current pretax income, all of your current expenses, and everything you have in savings, investments, or other assets. While you’re at it, calculate your DTI by dividing the total of all debts your owe by your pretax income. Finally, get your credit report. Low income does not automatically mean a low credit score. Most mortgages require a credit score between 580 and 670. The higher the credit score, the better your interest rate will probably be.
- Find out if you qualify for assistance. There’s a chance you qualify for down payment assistance, home buying grants, or seller-paid closing costs.
- Find out what options are available. Not all mortgages have the same requirements. Non-conventional loans (those backed by the federal government) are designed to benefit low income borrowers and usually allow smaller down payments and higher DTIs. Most conventional loans (those not backed by the government) do not have income limits, and some have extra benefits such as no credit score requirement, alternative down payment sources, or greater flexibility in income qualification.
Common mortgage programs best suited low-income homebuyers.
- FHA loans. Government-backed loans that allow a 3.5% down payment, higher DTI ratio limits, and credit scores as low as 580.
- USDA loans. Federally-insured loans specifically for low-to-medium income borrowers. Income must be below a certain threshold (115% of the average area median income). The PMI fee is only 0.35%, and certain home repairs can be included in the loan amount.
- VA loans. For qualifying active, retired, or honorably discharged military personnel and their spouses. They do not require a minimum down payment.
- HomeReady Mortgage. A conventional mortgage from Fannie Mae, one of the largest investors in mortgages. The income of every person living in the house is included, increases your DTI, and requires as little as a 3% down payment.
Get good advice.
Make sure all your homework is on the right track. Reach out to me for a fuller picture of what the possibilities are for you. We are passionate about bringing homeownership to as many people as possible. We know low income borrowers face plenty of challenges, but we go above and beyond to help everyone realize their dream with a workable, financially responsible loan. We offer many mortgage loan options. We likely have one that’s right for you.
Contact our office with any questions, concerns or ideas. No Question is too small.
