How to buy a home on $50,000 per year

Michele Lerner
The Mortgage Reports contributor

Buy a home with less income

Think a $50,000  annual income isn’t enough to buy a home? Think again.

That figure is just a little less than the average household income ($59k) in the US, according to the Census Bureau. In many areas of the country, that income is enough to turn a renter into an owner.

Government- and agency-sponsored programs like HomeReadyTM , USDA Rural Housing, and FHA and Community Seconds help lower income families afford homes.

There are many products available to help those with low down payments, smaller incomes, or both.

Ready to see if you can buy a home? Start here. (Dec 8th, 2019)

Affordability: Know this number

While many factors impact the amount you can borrow, your debt-to-income ratio (DTI), which compares your monthly gross income and the minimum payment on other debt, is essential to the equation. The standard maximum DTI for most lenders is 41 percent.

With a $50,000 annual income ($4,167 per month), $1,700 in housing and other monthly payments gets you a 41 percent DTI. If $400 of your monthly debt payments go to a car loan, a student loan and minimum payments on your credit card debt, you would have $1,300 to spend for housing.

With a five percent down payment and 4.0 percent interest rate, you could probably buy a home for a maximum price of around $200,o00.

However, a simple mortgage calculator doesn’t factor in property taxes, homeowner’s insurance or private mortgage insurance (PMI), which is typically required when you make a down payment of less than 20 percent.

Adding in those costs lowers your maximum home price. PMI varies according to your credit score and the size of your down payment, but it could add $75 to $100 to your monthly housing cost.

Expand your home-buying budget

As you begin to look at houses in your preferred location, you may find that you’d like to increase your price range to get more of what you want in a home. There are several options to consider and discuss with your lender.

Increase your down payment

If you have the cash, you may want to up your down payment to 10 or 20 percent. A down payment of 10 percent ($21,000) brings your maximum home price to $215,500, which may be enough to buy a home that you want.

If you don’t have the cash, keep in mind that you can ask relatives for gift money and you can search for homebuyer assistance programs from state and local government programs that provide down payment and closing cost funds.

Related: Community second mortgages for down payment and closing costs

Pay down your debt

The minimum payment on your accounts determines your debt-to-income ratio. By paying down your credit card debt or eliminating a car payment, you can qualify for more house.

For example, in the scenario above, reducing your monthly obligations by $200 could increase your maximum price to $234,000.

Use a piggyback loan

Another strategy that could help you increase your budget a little is to finance your home with a first and second mortgage to eliminate the need for mortgage insurance.

An 80-10-10 mortgage or an 80-15-5 refers to a first mortgage for 80 percent of the home’s cost, a second mortgage of 10 or 15 percent and a down payment of 5 or 10 percent.

Sometimes sellers are willing to provide that second loan. Either way, you can add $80 to $100 to your housing payment if you eliminate PMI.

Try a HomeReadyTM loan

Fannie Mae’s HomeReadyTM mortgage program offers several advantages, including a 3 percent down payment requirement, lower PMI premiums and expanded debt-to-income ratios, as high as 50 percent in some circumstances.

Consider an FHA loan

FHA-insured loans allow 3.5 percent down payments, as long as the applicant has a FICO exceeding 579.  Those with FICOs between 500 and 579 must put 10 percent down.

FHA mortgage insurance can make these loans more expensive, however. They require both an upfront premium and a monthly addition to your loan payment.

Still, FHA allows for much higher debt-to-income ratios compared to conventional loans. Sometimes, you can use up to 50% of your before-tax income or more toward your FHA loan payment.

Verify your FHA home buying eligibility. (Dec 8th, 2019)

Increase your credit score

Conventional (non-government) loans often come with risk-based pricing, which means if your credit score is lower than 740, you’ll pay a higher interest rate on your loan.

Mortgage interest costs also increase as your credit score decreases.

Take steps to raise your score. It could mean you can lower your interest rate and therefore your monthly payments. You’ll also have a better chance of qualifying for a loan program with a higher debt-to-income ratio if your score is higher.

Related: What credit score do you need for a mortgage (complete guide to credit scoring)

Consider an adjustable rate mortgage

A 5/1 ARM, compared to a 30-year fixed mortgage, carries a lower interest rate and monthly payment. Make sure you understand how much your rate could change in Year 6. Run the numbers with a loan calculator, using your future loan balance and the maximum new rate. See what the monthly payment could be.

Most who buy a home don’t keep their homes or mortgages for 30 years. Depending on your age, career and goals, you are likely to keep your home for five-to-ten years.

Negotiate with the seller

There is no reason you can’t ask for seller contributions instead of a lower purchase price. Depending on the mortgage you choose, the seller can contribute three to six percent of the home price in closing costs.

This can make all the difference when you want to buy a home and stop renting. Seller contributions can cover closing costs, buy your interest rate down to a more affordable level, or make a one-time payment to cover your mortgage insurance.

Think multi-family

Buy a home for you and a bunch of other people. By purchasing a duplex, tri-plex or four-plex, you can live in one unit and rent the others out. This gives you access to primary residence loan programs with low rates and costs, but you also get the advantage of rental income to pay your mortgage.

You can use a VA loan or FHA mortgage as long as you live in one of the units.

What are today’s mortgage rates?

Today’s market provides multiple strategies to increase your budget when you buy a home. Work with a lender to explore your financing options.

Today’s low mortgage rates go a long way toward making houses affordable to those with moderate incomes. Check out available programs and see how much home you can buy.

Verify your new rate (Dec 8th, 2019)