How to buy a house with low income
Many renters who don’t make a lot of money assume they could never own a home. But that’s often not true. Believe it or not, mortgage lenders aren’t that concerned with your income level; it’s just one piece of the mortgage approval process, and not even the most important one.
The key thing is that your income and employment are stable. If you have steady earnings and a decent credit score, you might easily qualify for one of these low-income home loan programs.
In this article (Skip to…)
- Low-income loans
- Can I buy a house?
- How lenders view income
- Debt-to-income ratio
- Eligibility tips
- Paying PMI
Low-income home loans
There are many loan options available today that cater to lower-income households. In fact, many agencies set income limits on their home loan programs to make sure they’re reserved for people with average or below-average earnings. The following low-income home loans are a few great options to explore.
1. USDA loan
The USDA loan can be an ideal option for lower-income borrowers because it requires no down payment and comes with lower fees than an FHA loan.
To apply for a USDA loan, you need to buy a home in a “rural” area, as defined by the U.S. Department of Agriculture (USDA). But rural as well as suburban neighborhoods around the country are eligible. Many cities and towns just outside of major metropolitan areas fall within the USDA’s “rural area” boundaries.
These loans are so attractive that USDA has set maximum income limits to make sure they are being used by those who most need them. Current limits are set at 115% of the area’s median income. For example, the following are annual household income limits for popular areas around the country.
- Portland, Oregon: $111,200
- Dallas, Texas: $102,350
- Gainesville, Florida: $91,900
- Flagstaff, Arizona: $91,900
These moderate income limits are not restrictive by any means. They’re even higher for households with more than four members. Still, they demonstrate the USDA’s focus on lower-income applicants. That also shows up in this program’s debt-to-income ratio requirements.
While “by the book” DTI limits are set at 41% on USDA-backed mortgage loans, many borrowers can be approved at higher DTIs with decent credit scores or other compensating factors. As a home shopper with a lower income, check your USDA eligibility when you apply for your home loan.
2. FHA loans
The U.S. Department of Housing and Urban Development operates the FHA loan program, which exists to make home buying easier for lower-income and lower-credit Americans.
It’s no surprise that low-income borrowers often choose FHA. Because the Federal Housing Administration insures these loans, lenders can approve applicants with very high DTIs. Plus, the program requires just 3.5% down for borrowers with credit scores of at least 580.
Credit leniency is another area where FHA shines. It may be possible to get approved with a credit score as low as 500 if you can make a 10% down payment.
Lenders aren’t shying away from approving low-income or low-credit home buyers. Further, because federal mortgage insurance protects approved lenders, they can offer competitive interest rates to FHA-approved borrowers.
3. VA loans
Most active-duty military service members and veterans can use a VA loan. With backing from the U.S. Department of Veterans Affairs, these loans require zero down payment. The barrier to entry is almost non-existent.
The VA loan comes with other major perks, too. For example:
- VA loans have no monthly PMI
- VA mortgage rates are extremely low
- There’s no official credit score minimum
- Lenders can be flexible about DTI ratios
Thanks to their below-market mortgage rates, VA loans tend to have cheaper monthly payments than other options, like FHA or conventional loans. Borrowers also save money because the VA never charges monthly mortgage insurance. In short: this is an ideal program for low-income buyers with limited monthly cash flow.
If you’re a service member, veteran, surviving spouse, or in the Reserves or National Guard, this is the first home loan program you should look at.
4. HomeReady and Home Possible
Lower-income borrowers can also find conventional mortgages with low down payments and high DTI limits. Conventional loans are not insured by government agencies like the FHA, USDA, or VA. Instead, they are regulated by Fannie Mae and Freddie Mac, which are sponsored by the federal government.
Fannie Mae’s HomeReady loan requires only 3% down, and you may be able to count income from a boarder or roommate, which could lower your DTI and help you qualify for a larger mortgage loan. Freddie Mac has a similar program called Home Possible. With Home Possible, you could use income from a co-borrower who doesn’t live with you to boost your application.
Conventional loans do require private mortgage insurance (PMI). But unlike FHA and USDA mortgage insurance, you can cancel PMI once you’ve paid down the loan amount by 20%.
In addition, both HomeReady and Home Possible come with reduced PMI rates, saving borrowers money compared to an FHA or standard conventional loan.
5. Good Neighbor Next Door
The Good Neighbor Next Door program is available to certain public-sector employees including law enforcement officers, teachers, firefighters, and emergency medical technicians. In other words, to professions known for being paid a lot less than the job is truly worth to society.
As a “thank you,” HUD, the administrator of FHA, offers some of its owned real estate at a 50% discount. So if you’re eligible for Good Neighbor Next Door, you could buy a home at half price.
There are some important caveats to consider here. You can choose only from HUD-owned single-family homes that are usually located in designated “revitalization areas” — you couldn’t shop on the open housing market. Still, at fifty cents on the dollar, even very low-income home buyers could afford to buy a house via the GNND program.
6. Down payment assistance programs
Many renters assume they could never save up enough money for a down payment. But they may not have to.
Public housing finance agencies, city and county governments, and nonprofit organizations are all sources of down payment assistance loans and grants that could help you become a homeowner. These programs often require homebuyer education courses, and some require higher credit scores than mortgages without down payment assistance.
Many of these housing programs welcome only first-time buyers, but this definition includes families who haven’t owned a home in at least three years. To find a first-time home buyer program near you, ask your real estate agent or just Google “down payment assistance programs [your area].”
You might be surprised to find thousands of dollars sitting there waiting to be used. In some cases, local governments can offer tax credits, too.
Can I buy a house with low income?
Home buyers at any income level can apply for any mortgage program. There is no minimum income for a mortgage, period.
However, salary isn’t the only factor lenders look at. Borrowers need to meet down payment requirements and credit score minimums, too. A lender will consider your full financial profile to make sure you can comfortably afford the home you want to buy.
Every buyer is different. But as a rule of thumb, it’s often possible to buy a house with low income if you meet these requirements:
- Stable two-year job history
- Steady, reliable income
- Credit score of at least 580-620
- Minimum down payment (3%-3.5%)
- Debt-to-income ratio below 45%
- No recent bankruptcy or foreclosure
A great first step for home buyers is to get preapproved by a mortgage lender.
By filling out a short preapproval application, you can learn which home loan programs you qualify for, how much house you can afford, and what your mortgage payment is likely to be. This will give you a much clearer picture of your home-buying prospects and help you get started.
How mortgage lenders look at income
Mortgage lenders don’t look at your income as a single number. Rather, it’s your proposed, future mortgage payments — compared to your income — that matter most. This will determine whether you can afford the home, which is much more important than considering income in a vacuum.
To determine affordability, lenders look at your debt-to-income ratio (DTI). DTI compares your current debt payments to your income.
This ratio is vastly more important than raw income data. In fact, a lender would much rather approve a borrower who earns $30,000 per year with a 28% DTI than one who makes $200,000 per year with a 50% DTI. Let’s break things down with a closer look at how DTI is calculated and why it matters.
Why debt-to-income is important
Lenders love applicants with low debt-to-income ratios. Low debt payments mean applicants can manage their finances well despite a low income level. This kind of applicant is a “good” credit risk. Let’s look at two applicants and how lenders evaluate them.
|Low Income||High Income|
|Future Mortgage Payment||$650||$2,500|
|Taxes, Insurance, HOA||$200||$450|
|Credit Card Payment||$25||$350|
|Total Debt Payments||$975||$4,800|
The lender will have a much easier time approving the low-income applicant in this example. Typically, the DTI limit is 43% for conventional loans. As it stands, only the low-income applicant makes the cut.
Tips to qualify for low-income home loans
Income matters to mortgage lenders, but not because of strict income requirements. Income matters within the context of your existing debt load and your credit profile. Even if you can’t increase your income, you can increase your home-buying budget by improving your financial life before applying for a mortgage. Start by:
- Paying off some debts. If you have a car loan or a personal loan that’s almost paid off, try to pay it off in full before applying for your home purchase loan. This could lower your DTI and boost your home-buying budget
- Improving your credit history. Errors on your credit report could be pulling down your credit score. Disputing these could help you qualify for a bigger home loan. And making a habit of paying your bills on time should improve your credit history over time
- Saving up some money. Bringing your own down payment and closing cost money to the table simplifies mortgage qualifying. If you can’t save, look for down payment assistance programs that help low-income families in your area
- Applying with a co-borrower. Income from a co-borrower could strengthen your loan application as long as your co-borrower has solid credit and isn’t saddled with heavy debt
- Using the right home loan program. The right loan program should line up with your specific needs. For example, FHA loans work well for first-time home buyers with lower credit scores, and USDA loans excel for applicants with no down payment. If you don’t need this kind of help, you might save money with a conventional loan
- Using location to your advantage. Sometimes you can find nicer homes for less money when you’re willing to shop outside your region’s most popular neighborhoods
By strengthening your status as an applicant, you can score lower monthly payments for the same home — all without increasing your income.
Will I have to pay private mortgage insurance?
For many borrowers, mortgage insurance seems like an annoying extra fee added to their monthly payments. After all, this coverage protects only the lender in case of foreclosure — even though the borrower has to pay for it. But PMI has a purpose for borrowers, too: It lowers the risk for lenders, which allows you to buy with a small down payment or lower credit.
A conventional loan with 20% or more down won’t require mortgage insurance. VA loans don’t require annual mortgage premiums even if you don’t make a down payment. But FHA loans, USDA loans, and conventional loans with less than 20% down will need this extra coverage.
USDA and FHA loans require an upfront mortgage insurance fee along with ongoing annual premiums for the life of the loan in most cases. Conventional mortgages won’t require the upfront fee, and you’d be able to cancel annual payments once you’ve paid off 20% of the loan.
Applying for a low-income home loan
Your income is only a secondary factor when it comes to loan approval. The lender will put much more weight on your monthly debts, your credit score, and other factors. That means you don’t need to make a lot of money to buy a home. You just need to be a responsible money manager.
Get a personalized home-buying eligibility analysis. There’s no obligation to proceed, and you might be surprised at what you can qualify for.