You Don’t Need Sky-High Income To Buy A Home

April 23, 2017 - 5 min read

Low-Income Home Buyers Surprised At What They Can Afford

Traditional “wisdom" states that you need to have a lot of money — and make a lot of money — to buy a home.

That notion is fading.

There are an abundance of low- and no-downpayment mortgage programs available in the market. Zero-down loans make up about 14% of today’s market, according to the Consumer Financial Protection Bureau.

Beyond down payment, though, do you need a high income to qualify?

A recent report by the National Association of REALTORS® (NAR) answers that question.

The NAR study shows that families can buy a home with as little as $33,000 in annual income. And, even that figure might be a high estimate.

Even if you don’t make a lot of money, 2017 could be the year you buy a home.

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NAR: Some Home Buyers Need Very Little Income

Each quarter, the National Association of REALTORS® publishes its Metropolitan Median Area Prices and Affordability report.

The study uses NAR housing data and income statistics from the U.S. Office of Management and Budget to measure affordability in nearly 200 metros across the U.S.

Results from the fourth quarter of 2016 were surprising.

While home prices are rising (up 5.7% nationwide in one year), so are incomes. Jobs are more plentiful, and employers are paying more to retain employees.

These factors, combined with ultra-low mortgage rates, have resulted in one of the most affordable housing markets in recent memory.

Home buyers with lower incomes are taking notice.

According to NAR, you don’t need a big income to buy a home.

The trade group estimates a family needs an annual income around $43,000 to buy a home at the national median price, with 20% down. That’s a modest income, considering a jump in the national median annual earnings near $71,000.

Regionally, home buying prospects are even more promising.

A family with 20% down in the midwestern U.S. needs just $33,108 in annual income to buy a median-priced home, says the study.

Other regions fared almost as well.

The following income levels were needed per region when putting 20% down.

  • Northeast: $46,454 annually to buy the median-priced home
  • Midwest: $33,108 annually to buy the median-priced home
  • South: $38,438 annually to buy the median-priced home
  • West: $63,766 annually to buy the median-priced home

Modest earners in these areas should check their home buying eligibility.

Have less income? You might still qualify. NAR’s methodology might be a bit too conservative.

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You Might Qualify For More Than The Study Suggests

NAR makes some assumptions when calculating income levels to buy an average home.

The problem is, those assumptions are quite conservative.

First, it assumes a 3.9% interest rate.

Mortgage rates for FHA home loans are currently well below that, as are rates for other government-backed loans like the VA mortgage and the USDA loan.

Finding a 30-year fixed rate for these programs in the mid-3s is not uncommon.

Second, the trade group assumes only 25% of income is going toward the mortgage payment. This is conservative — even unrealistic — in many markets.

Lenders agree.

Mortgage companies, banks, and other lending institutions offer FHA loans, whose guidelines state the mortgage payment may consume 31% of the applicant’s income or more.

Even Fannie Mae and Freddie Mac loans, considered more conservative than FHA, allow greater than a 25% portion of the borrower’s income earmarked for the mortgage payment.

Financially responsible applicants can “push the limits” on their debt-to-income ratio — the comparison of their income and payments.

Some advisers and so-called experts recommend a very manageable home payment amounting to less than 25% of income.

But if the choice is between an ultra-conservative home purchase and renting indefinitely, there’s actually less risk in buying.

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Rising Rents Convince Home Buyers To Look Into Low Income Home Loans

Rents rose nearly 8% in 2016 in some locales, according to a recent study.

Fortunately, renters still have a closing opportunity to lock in their home costs for the foreseeable future.

Buying a home with a 30-year fixed rate — or even a 5-year adjustable rate mortgage — provides much more cost-of-living security than renting.

For those on a tight budget, buying a home could be one of the smartest moves of their lives.

Incomes aren’t rising as fast as rents are. Eventually, families are forced to move into smaller living spaces further away from employment. Landlords charge what the market will bear, and the market is telling them to raise their rates.

This is reason enough for home buyers to look into low-income home loans as a solution to rising rent.

Three programs stand out as solid solutions to perpetual rentership.

The FHA loan was created in 1934 for home buyers who don’t fit in the traditional lending “box”.

Back then, banks were lending only to the most qualified of borrowers. The government stepped in to provide a low-down payment loan for which the average and even below-average renter could qualify.

The loan requires just 3.5% down, and some applicants with scores as low as 580 will be approved.

Likewise, the VA home loan was created to give U.S. military veterans and active-duty personnel a real path to homeownership. There is absolutely no down payment requirement, and private mortgage insurance is never charged.

Finally, the least-known mortgage program on the market also happens to be one of the most advantageous.

The USDA home loan is offered to applicants in less-dense neighborhoods across the U.S. Eligibility is location-based, but a surprising 97% of the U.S. land mass is USDA-approved.

All of these programs come with higher-than-standard DTI limits, meaning your income is not as much of a factor as with tighter Fannie Mae and Freddie Mac loans.

Lenders can approve a DTI up to 50% in some cases, meaning half your income can go toward your home payment and other monthly debt payments.

If you’re renting, it’s worth checking into these programs now to see if you are eligible.

Qualifying now means forever-freedom from the whims of a landlord.

Check Your Eligibility For Low Income Home Loans

An eligibility check is included in a rate quote, and rate quotes come with no obligation.

Today’s rates are low, further increasing chances of approval, even for home buyers without large incomes.

Time to make a move? Let us find the right mortgage for you

Tim Lucas
Authored By: Tim Lucas
The Mortgage Reports Editor
Tim Lucas spent 11 years in the mortgage industry before moving into the world of digital media. He's helped thousands of families buy and refinance real estate at banks and mortgage companies and now continues that mission through industry-leading content. Tim has been featured in national publications such as Time, U.S. News and World Report, MSN, Scotsman Guide, and more.